Why Agents Should Be Careful With Financial Aid Planning
Paying for higher education is on the minds of many Americans first and foremost. An entire industry has evolved to help individuals maximize financial assistance to cushion the tuition bill.
Financial aid can take many forms, such as scholarships, grants, and loans. Help can also come from many sources, including federal or state governments, higher education institutions, or banks.
Financial advisors may be quick to suggest cash value life insurance to bolster a student’s financial aid program, but the impact of cash value life insurance on federal financial aid may be. be negligible at best. This is because the federal methodology is primarily an income test (not an asset test), and need-based federal aid is only available to students in the most financial need.
Let’s take a look at some elements of the federal financial aid formula (i.e. the federal methodology) that are used to determine the expected family contribution of a student. We will explore the three types of financial assistance offered by the federal government: loans, grants and federal work-study.
The federal methodology is primarily an income test.
To be eligible for Federal Financial Aid, each potential student must file the Free Federal Student Aid Application, or FAFSA. While the FAFSA is relevant to graduate students and professionals, we will approach the FAFSA through the lens of a parent and their dependent child who is considering attending a higher education institution. (See graph 1).
The inputs from the FAFSA are incorporated into the formula prescribed by the federal methodology and are used to determine a Student’s Expected Family Contribution (EFC), in other words, how much money a student and their parents can be expected. to contribute to the cost of higher education. The difference between CFE and the cost of attendance is called the unmet student need. With regard to federal financial assistance, this need can potentially be met through loans, grants or a federal work-study program. The idea behind financial aid planning is to manipulate a family’s balance sheet and income statement to reduce CFE and thus increase the amount of student need and the financial aid for which he or she will receive. law.
The federal methodology uses income from two tax years prior to the start of the academic year for which the student is requesting assistance (2018 tax year data will be used for FAFSA 2020-2021). Income includes Adjusted Gross Income (AGI) as well as certain other non-taxable income such as contributions to a 401 (k) plan or other tax-deferred retirement plan. In calculating the SCF, a student’s income is estimated at 50%, while parental income is assessed on a sliding scale up to 47%, and reaches 47% at over $ 19,000 of income. .
The same countable / uncountable rules apply to parents’ property as well as to student property. However, in the EFC formula, student assets are valued at 20% while parent assets are valued at 12%. “In other words, most parents will have to contribute is just over 12 cents for every dollar of additional assets.
A solidly middle-class family may already have most of their net worth locked in in uncountable assets, such as equity in their primary residence and retirement accounts. Moving $ 100,000 from a CD to a cash value life insurance policy would theoretically reduce this family’s CEF by $ 12,000. And that reduction in CFE is unlikely to be enough to get this student additional federal financial aid he was not already entitled to.
All student and parent borrowers are eligible for federal loans, regardless of their needs.
Federal financial aid is designed to help close the gap between the cost of attendance and CFE (unmet need) or to be available through CFE if the family does not have the money in hand.
Unsubsidized student loans are available to all student borrowers, regardless of their financial needs. These are loans not based on need; all the students still of their CEF are eligible. However, unsubsidized loans are only offered for limited amounts, which depend on the academic year of the student.
If mom or dad doesn’t have an adverse credit history, and sometimes even if they do, they may be able to get a PLUS loan from the federal government. PLUS loans are also not need-based and can be disbursed up to the full cost of attendance, less any other financial assistance received.
The point to emphasize here is that purchasing a cash value life insurance policy does not increase the amount of money a parent can borrow from the federal government, nor does it increase the amount of cash. unsubsidized loans that an undergraduate student can borrow from the federal government. Showing more or less accounting assets on a family’s balance sheet does not affect eligibility for these loans. These are non-need based loans and EFC is irrelevant in determining the amount of non-need based loans that can be borrowed.
Only the most needy students will be eligible for federal need-based aid.
The remainder of the assistance available from the federal government is referred to as need-based assistance and includes soft loans, scholarships, and work-study programs. Subsidized loans and federal work-study programs are granted to students with “financial needs”.
Subsidized loans, however, do not increase the amount of federal loans a student can borrow; subsidized loans indicate that part of the student’s federal loan will receive preferential interest treatment. When it comes to the federal work-study program, each school will have different funding levels for the program. However, the number of hours worked cannot exceed the total amount of a student’s federal work-study scholarship.
There are currently four federal grant programs available to borrowers. Financial need is irrelevant for two of the grants. The Pell Grant and the Federal Additional Educational Opportunities Grant are only available to students with “exceptional financial need,” a financial need greater than that required for subsidized loans and for the federal work-study program. Grants, unlike loans, do not have to be repaid if the conditions of the grant are met. Not all schools participate in the FSEOG program, and those that prioritize Pell Grant recipients.
Students who receive subsidized loans, scholarships, and federal vocational studies programs are more likely to come from families receiving means-tested federal benefits such as food stamps, Medicaid, Supplementary Security Income, or the program. free or reduced-price school meals. These families may have incomes close to or below the poverty lines. Low-income families enjoy various advantages when it comes to calculating the SCF. Assets do not count in calculating the CFE for some families with an AGI of $ 50,000 or less.
It will be very difficult for middle class families to compete with low income families for need-based federal financial assistance, as the federal methodology weighs much more on income than it does on assets. The purchase of a cash value life insurance policy is unlikely to change a family’s financial profile enough to create a picture of poverty (ie “financial need” or “financial need”). exceptional financial need ”) and qualify that student for subsidized loans, scholarships or federal work. -Study.
Since the federal methodology is primarily an income test (not an asset test) and federal need-based assistance is only available to the most financially needy students, asset repositioning in insurance- life with cash value is unlikely to have a dramatic impact on a student’s CFE and their eligibility for federal aid based on need. Plus, all students and parents are eligible for federal loans, regardless of their needs.
Cash value life insurance is possibly one of the most versatile and valuable financial products on the planet. However, positioning it to improve a student’s federal financial aid because cash value life insurance is a non-countable asset (a) is unlikely to work and (b) is likely to depreciate its value in the eyes of the consumer. . In addition, the reputation of the individual financial advisor or company recommending such a strategy may be called into question.
The time to have a conversation about cash value life insurance isn’t two years before a child goes to college. This moment was probably right when the child was born. Encourage a young family to buy permanent protection that can be used in countless ways to their advantage – and guess what! This does not affect their child’s eligibility for federal financial assistance.