I touched on this subject in my 2024 Financial Aid & FIRE and Surprise Benefit of FIRE in Southern Illinois post. Still, I would like to elaborate further on my frustration with the financial aid system of top-tier colleges.
Ignoring assets is enormous for all families, especially those that have retired early.
About 4000 colleges use FAFSA, and only 250 use CSS. Unfortunately, many of these 250 schools are considered the most prestigious, with the lowest acceptance rates. Princeton is the only university in the top ten that does not use CSS but still uses its own system, including family assets.
Schools like Harvard have great needs-based aid for the majority of the population. But you will receive no assistance if you have ~$1.8+ million in assets, even if your family’s income is zero. For every $100K less in assets, you will receive ~$5,000 in aid. If you have $800K in assets and low income, you may receive $50,000 in scholarships. Once you get down to $200K, you can receive the maximum scholarship and still be required to pay $3,500/year to attend.
I can already sense people saying, what the hell is this rich guy complaining about? If you have $2 million, you can pay $83,000 yearly for your kid’s college!
That’s more than fair. I’m not expecting sympathy. I am living a different lifestyle than most.
When you are retired, you don’t plan on earning any more money besides the money you have. You plan to take out about 4% annually to pay for your expenses. 4% of $1.8 million is $72,000—less than the private college cost for one year. For two kids, you are considering spending $1.2 million for the eight years of school. You wouldn’t have only $600K in savings. But you will have significantly less money than you originally planned.
I have no issues helping pay for my child’s education. $80,000+ a year is not realistic for 99% of Americans.
Can Anything Be Done?
You need to be in a unique situation to move assets around without dramatically affecting your income or causing you to lose money in the process.
If you can move your wealth, you want to do it as soon as possible, preferably before your child’s Sophomore year. FAFSA and CSS look at your tax filings from two years previous. You will use your 2022 income if your child attends college in the fall of 2024.
However, the assets that you report are current when you sign the FAFSA application.
Colleges will reassess your financial aid every year. So it would help if you waited until their Senior year before making other moves that could hurt your child’s aid.
If you are lucky enough to move assets, you must familiarize yourself with how the CSS and FAFSA will treat the different types of assets you may have.
Assistance calculations exclude:
- Primary residence*
- Retirement accounts
- Life insurance
- Personal possessions
*Your primary residence is excluded from FAFSA calculations and either excluded or limited from some CSS school calculations.
Option #1: Buy A Bigger House
If your child’s college excludes home equity from their calculations, transferring your wealth to your residence is a great option.
Unfortunately, that also comes with the costs of selling your current home and increased property tax. You also will sell your new massive home after your child finishes college so you can downsize.
Here’s a possible situation.
You have a $500K home and want to move into a $2M residence. You will pay $30K to sell the home. You will also see your yearly property tax go from $5,500 to $22,000. Then, you will spend another $120K to downsize. You just spent $216K to save possibly $320K. $100K is a lot of money, and it could be worth it, but it’s less than you might have initially assumed.
Option #2: Fund Retirement Accounts
Usually, you want to put less money in your retirement account once you are retired. But you can use a Roth Conversion Ladder to access your money early.
Unfortunately, there are annual contribution limits and a 6% penalty if you overfund an account. Since colleges generally expect 5.64% of your worth to pay for your child’s schooling, there is no reason to pay the penalty.
Option #3: Personal Possessions
I will use this as the catch-all “spend your money.”
Does your kid need a car for college? Buy them one, and use their UTMA if they have one. Calculators expect the student to use 20-25% of their assets on college, so the less they have, the better.
You can pay off debt and fix your home sooner rather than later. You could buy some expensive art or jewelry, but there’s no way I’m sinking massive amounts of my savings into “things” so my child can save on college.
Option #4: Life Insurance / Annuities
I have never seriously considered purchasing life insurance. My life insurance is the massive sum of money I have already saved.
If you want to move your money into life insurance to avoid it being included in financial aid calculations, you will also want to pull it back out afterward. Meaning you would like to use whole life or universal life.
After researching this option, I realized it was worth a post. Look forward to…
Can You Successfully Use Life Insurance to Shelter Assets from FAFSA/CSS?