Welcome to the College Prep Confidential Podcast
May 26, 2019

CPC Episode #4 - Discover How To Use Financial Aid Alchemy To Boost Your Financial Aid Package

In Episode 4, we cover the secret of Financial Aid Alchemy, and how you can move, or reclassify your assets and income to get more financial aid. You'll discover: What financial aid alchemy is, and how one family used it to get $30,000 in additional...


In Episode 4, we cover the secret of Financial Aid Alchemy, and how you can move, or reclassify your assets and income to get more financial aid. You'll discover:

  • What financial aid alchemy is, and how one family used it to get $30,000 in additional financial aid
  • The Financial Need Equation, and what lever you can pull to get more money by lowering this 3 letter number
  • How lowering this 3 letter acronym raises your financial aid eligibility
  • How To Make Income and Assets "vanish", raising your financial aid yield
  • What you can learn from magicians to increase financial aid
  • What the base year is...and why lowering your income in this year increases financial aid
  • What number to reduce which is 8 times more effective than any other number to getting more financial aid
  • Avoid these artificial increases in income, and the government will give you more money
  • The two types of assets. Skip this, and you'll leave thousands on the table for financial aid
  • The Mother Bird Secret to getting more money from colleges
  • 7 states which will give you more money just by winning this "race"
Transcript

Welcome back to College Prep Confidential, Episode 4. Today’s episode will cover, the Financial Aid Alchemy.

Back in medieval times, scientists and magic men used a process called alchemy. Their goal: Transform salt, lead, and other elements into gold.

Alchemy defined: a seemingly magical process of transformation, creation, or combination.

What we want to do is use this same transformation with money and financial accounts, to create more eligibility for financial aid.

Here’s how it works: We’ll transform and redefine your financial accounts and assets into college aid eligibility. And this increased eligibility transforms into more college aid for you.

Your first question may be… well Don, why isn’t everybody doing this? 

There’s a few answers…

  1. First, they don’t know
  2. Second, they know, but not sure how to
  3. Third, they know how to, but don’t have the time to do it. And at the end of this show, I’ll show you how to get all of this done for you.

But first, let’s focus on financial aid alchemy. We’re going to perform 3-letter alchemy. College funding, 3 letter alchemy. And I’ll get to the 3 letters of alchemy in just a moment…

But first...

This equation determines how much financial aid from college you're eligible for. Not how much you'll get. But how much you're eligible for. My goal, our goal, is to raise your eligibility amount.

And to maximize your financial aid, you must "lower something to raise something else".

And in this episode, you'll learn how lowering one of the numbers, a.k.a., Financial Aid Alchemy this this equation. The 3 letters in this Equation raises your chance to get MORE financial aid from colleges. 

Your Expected Family Contribution, known as the 3 letters of (EFC) is an index number that colleges use to determine how much financial aid you’re eligible to receive. Your EFC is calculated according to a formula established by law and the information from your Free Application for Federal Student Aid (FAFSA).

The EFC factors in your family's taxed and untaxed income, assets, and benefits (such as unemployment or Social Security). Your family size and the number of family members who will attend college during the year are also considered.

Note: Your EFC isn't the amount of money your family will have to pay for college and it isn't the amount of federal student aid you'll receive.

How your EFC affects your financial aid package

Typically, the lower your EFC, the more financial aid you'll be eligible to receive. Your financial need can be found by subtracting your EFC from a school's cost of attendance (COA). The COA is typically tuition, books, supplies, transportation, room, and board.

COA - EFC = FN

Financial need is calculated using the Free Application for Federal Student Aid (FAFSA). 

Even if you have enough in savings to pay for college, it’s still smart to fill out the FAFSA. You’ll fill it out every year after doing your taxes, and the earlier the better. The key here, and the biggest mistake people make for not maximizing financial aid is...how they arrange their money. We’ll get to how we move money in a moment, but first...

Let’s review the 3 parts of this equation:

COA = Cost of Attending College.

From the FAFSA.ed.gov website:

The cost of attendance (COA) is not the bill that you may get from your college; it is the total amount it will cost you to go to college each year. The COA includes tuition and fees; on-campus room and board (or a housing and food allowance for off-campus students); and allowances for books, supplies, transportation, loan fees, and, if applicable, dependent care. It can also include other expenses like an allowance for the rental or purchase of a personal computer, costs related to a disability, or costs for eligible study-abroad programs.

Let’s look at this equation and pull a lever. We need to lower EFC. EFC, by the way is the minimum amount the government feels you can afford to pay based on your income and assets and your child's income and assets.

But, the trick becomes, no matter what your net worth is, how do you lower EFC? By lowering EFC, you increase your financial need number, which makes you eligible for more financial aid. Lowering EFC, comes from making money “vanish [snap fingers]” from one account or classification, and moving it to another account. When I say vanish, you might be thinking, Don, is this legal? Yes, it’s perfectly legal. Your financial need has to do with certain assets you have, but not ALL assets.

So let's focus on lowering EFC.  (look in original Plan On College book for bank account switches to lower EFC)

https://www.road2college.com/strategies-to-reduce-efc/

How Is EFC Calculated On FAFSA

Since most students are dependents of one or more parents, we will assume hereafter that the student does not qualify as “independent.”  If your EFC is greater than your expected need (COA), there's a slim chance you will receive any financial aid. So you're goal is to shrink your EFC amount. This is how we use financial aid alchemy to shrink our EFC.

If you don't dig deep and use some creativity with your financial accounts, there's a chance you'll disagree with the EFC number calculated. The EFC formula assumes college will be paid from at least 4 sources:

  1. 22% – 47% of the parent’s income, plus
  2. 5.64% of the parent’s assets, plus
  3. 50% of student income (over $6,420), plus
  4. 20% of student’s assets.

Here’s the alchemy we’ll perform:

  1. Lower at least 1 or more of these 4 sources, you lower your EFC
  2. Lower your EFC, you raise your potential financial aid. Potential, meaning eligibility
  3. Raise your potential financial aid, you increase the amount of money which goes back into your pocket

Lower your income in the base year

Remember – the base year of income on which financial aid is calculated is the calendar year two years prior to the academic year for which the student is applying for aid. That’s why it’s so important to become informed about financial aid years before your child is a junior or senior in high school. Get a head start. Back in the old days of alchemy, the magicians and wiser heads got an early start on this, before anybody knew about it.

Remember, earlier, when I said we have to lower something to raise something else? Well, here’s a powerful strategy many parents overlook...reducing parent income. 

Reducing parent income is 8 times more effective than reducing parent assets. 

Since student owned assets are assessed at 20% on the FAFSA (25% on CSS Profile), students can and should move assets out of their names. 

Contribute to Roth IRA

Pay mortgage from assets

Mistakes to remedy for EFC. 

Start focusing on reducing EFC in Sophomore year. Don't wait.

Starting with the 2017-2018 FAFSA and thereafter, the income you will report comes from what is called the “prior prior year.” The 2018-2019 FAFSA will ask you about income from your 2016 tax return, instead of your 2017 tax return. This makes it easier to complete your FAFSA, but it means that most of the strategies below won’t affect your EFC for the 2018-2019 academic year.

Good strategy: Avoid artificial increases in income

  • Capital gains distributions
  • Retirement plan distributions (including a tax-fee return of contributions from a Roth IRA)
  • Exercising stock options
  • Bonuses
  • Gifts
  • Distributions from a qualified education benefit (529 college savings plan, prepaid tuition plan, or Coverdell education savings account) that isn’t parent-owned

Shelter Assets:

https://www.cappex.com/articles/money/how-to-shelter-assets-on-the-fafsa

Reportable versus Non-Reportable Assets. Shift more to the Non-reportable side. Here’s the key to financial aid alchemy. Get the money out of reportable assets, and into non-reportable assets. Think of it as a magic trick, where we start with 2 boxes with velvet cloths over them. On the one side is reportable assets, and the other side is non-reportable assets. We waive our magic wand, and when the velvet cloths get pulled back, the money is moved, as much as possible, out of reportable assets and into non-reportable assets.

Reportable Assets:

  • Cash
  • Bank Accounts including, checking, savings, CDs
  • Brokerage accounts
  • Money Market Accounts
  • Stocks, bonds, hedge funds REITS, commodities
  • precious metals
  • UGMA and UTMA
  • College Savings pLans like 529
  • Businesses
  • Investment farms
  • Real Estate
  • Trust Funds
  • Emergency Funds

Non-Reportable Assets:

  • Principal place of residence (family home). Strategy might be buy the house, let it appreciate, sell it after the kid gets financial aid
  • Family Farms
  • Small businesses owned and controlled by the family
  • Retirement plans like 401(k), 403(b), 457, pensions, annuities, IRAs, Roth IRAS
    • Max out retirement contributions. What's ALREADY in your retirement accounts does NOT count against you. So get it there early and often. (non-reportable assets)
  • Life insurance policies like cash value and whole life
  • Personal possessions, cars, boats, and other toys. Another strategy to use for higher net worth clients we've helped. 

Take cash to pay down your debt. When you do this, you serve two purposes. Reduce debt, reduce assets. We move the one from one box to another. 

Student Assets:

Better for a parent to save for college in the parent's name than in the students name

20% counted for students versus 5.65% for parents

Momma Bird Secret to Financial Aid Alchemy: File FAFSA Early:

Believe it or not, one of the best ways to maximize your financial aid package is to file your FAFSA  as early as possible. The early bird gets the worm, and the worm my friends, could be worth 3,000, 4,000, 10,000 or more if you act early.

Why? This is because some schools, and now seven states—Illinois, Kentucky, North Carolina, South Carolina, Tennessee, Vermont and Washington—award aid money on a first-come, first-served basis until funds are depleted.

Consider this: If you and 9 other people were running a race. Money gets distributed based on who gets there first, but you can start at any time, wouldn’t you want to start as early as possible and get a head start?

Why isn’t everybody talking about this? Again, some people know, some people do it, but not everybody knows and/or does it. And here’s another secret of financial aid alchemy...by getting educated about these tricks, you put yourself ahead of the pack.

And speaking of getting ahead of the pack...With sticker prices of top schools approaching $200,000, minimizing your EFC to maximize your potential need is essential. I've covered a lot in this episode, and there's more you can do to minimize your EFC. FAFSA forms can be difficult, and errors will cost you.  Earlier in the show, I told you I’d reveal a way for you to do all this. Everything I told you in this episode and more. I’ve put it all together in a free presentation, at CPCshow.com. It’s called, How To Beat Colleges at Their Own Game. If you need help from certified college funding experts using our proprietary holistic approach, check out the free training I've put together at cpcshow.com.  That's c-p-c-show.com. Using certified college finance specialists, this training walks you through more tips and tricks for maximizing financial aid, including where to put assets, and how to move money so you maximize financial aid. One of the families we helped, saved $30,000 on college. Now stop, and imagine for a moment, what you could do with an extra $30,000 in your bank account. Shopping trips, cars, vacations, upgrades to your home and your life. Let the colleges pay you, and keep more of your money. 

Why am I doing this free training for you? Because I know how ruthless competition is to get into college. I also know that the more financial aid you get, the more money you keep in your pocket for things you want to have in your life. And if you like this free training, then you may want additional help through my company for a full college planning session. But if not, you still get the free, valuable information. One more time for that free training, That’s cpcshow.com. I’ll see you next episode.