3 Questions That Can Provide A Spark For Your Financial Plan
If you are struggling to follow your financial plan or just need some help prioritizing your goals, take some time to consider these important questions:
Source: Forbes
Financial Lessons From Jake Paul's Lamborghini
My nine-year-old son recently announced that he plans to drive a Lamborghini Aventador to school when he earns his driver’s license. Luckily for him, that’s about eight years away, so he’s got some time to save up.
Source: Forbes
How To Fill The Income Gap If You Delay Social Security
Fortunately, making a few little changes to your retirement spending plan in the near term could result in some big benefits in the long run. Let’s compare a few options:
Source: Forbes
What Documentation can a College Financial Aid Administrator Request?
I’m an independent student who filed a 1040A last year so I was not
required to answer questions about assets on the FAFSA application. I
had very little income last year and have a zero EFC. I reported taxes
on capital gains and now my school is asking for information about my
investment assets (which are about $40,000). Can they use this to
lower my federal grant amount? I guess they can use whatever rules
they want about their own grants, but I want to be sure that this will
not impact my eligibility for Pell Grants.
— Ethan G.
Federal law and regulations grant college financial aid administrators
the authority to request information and documentation from financial
aid applicants. Assuming that the information reported on the
financial aid application is accurate and that there is no unreported
income, this is unlikely to affect eligibility for federal student
aid. It may affect eligibility for the college’s own grant funds,
depending on the college’s policies.
The college is asking for more information as part of a process called
verification. Verification is designed to detect and resolve
errors and discrepancies on the Free Application for Federal Student
Aid (FAFSA). Previously up to 30 percent of all FAFSAs were selected
by the US Department of Education for verification. College financial
aid staff can select additional FAFSAs for verification at their
discretion. Some colleges even select all FAFSAs for verification.
The US Department of Education is transitioning to a targeted
verification system where specific data elements on the FAFSA are
selected for verification based on a risk model. There will no longer
be a minimum or maximum number of FAFSAs selected for
verification. College financial aid administrators can continue to
choose to verify additional FAFSAs, even every FAFSA.
There are several possible reasons why your FAFSA may have been
selected for verification. FAFSAs are often selected for verification
when there is an apparent discrepancy involving income and assets. For
example, a potential discrepancy arises when capital gains,
interest and dividends are reported on the federal income tax return
but no assets are reported on the FAFSA. FAFSAs can also be selected
for verification when the applicant appears to have insufficient
income to pay for basic living expenses. These FAFSAs are selected for
verification because of the likelihood of unreported assets and
income.
The mismatch between capital gains on the federal income tax return
and the lack of assets on the FAFSA may have been caused by the
simplified needs test.
The simplified needs test causes assets to be disregarded on the
FAFSA. To qualify for the simplified needs test, the income reported
by the student and the student’s spouse (if the student is
independent) or the student’s parents (if the student is dependent)
must be less than $50,000. Income is based on adjusted gross income
for tax filers and earned income for those not required to file a
federal income tax return. In addition, they must each have filed or
been eligible to file an IRS Form 1040A or 1040EZ (or were not
required to file an income tax return), or one of them must have been
a dislocated worker, or someone in the household size must have
received certain federal means-tested benefits during the past two
years (e.g., SSI, Food Stamps, Free and Reduced Price School Lunch,
TANF, WIC).
This apparent discrepancy can be explained by the simplified needs
test, since the applicant is not required to report assets. Often the
models that trigger verification look for simplistic mismatches, such
as an amount of assets reported that seems inconsistent with the
capital gains and interest/dividend income reported on the income tax
return. This also potentially explains the lack of income, since an
applicant with assets can survive off of the assets and student aid
funds.
Authority to Request Documentation
Regardless of the reason for selecting a FAFSA for verification, the
college has the absolute authority to request such documentation as they
see fit in connection with the FAFSA. If a student or parent refuses
to provide this documentation, the student will be denied financial
aid.
The authority to request documentation comes from multiple
sources. First, the signing statement on the FAFSA provides this authority:
If you are the parent or the student, by signing this application you
certify that all of the information you provided is true and complete
to the best of your knowledge and you agree, if asked, to provide
information that will verify the accuracy of your completed form. This
information may include U.S. or state income tax forms that you filed
or are required to file. Also, you certify that you understand that
the Secretary of Education has the authority to verify information
reported on this application with the Internal Revenue Service and
other federal agencies.
Section 479A(a) of the Higher Education Act of 1965 also grants the
college financial aid administrator the authority to request documentation.
In addition, nothing in this title shall be interpreted as limiting
the authority of the student financial aid administrator in such cases
to request and use supplementary information about the financial
status or personal circumstances of eligible applicants in selecting
recipients and determining the amount of awards under this title.
The regulations also grant authority to the college financial aid
administrator to request documentation. For example, the regulations
at 34 CFR 668.51(b) states “Applicant responsibility. If the Secretary
or the institution requests documents or information from an applicant
under this subpart, the applicant shall provide the specified
documents or information.” The regulations at 34 CFR 668.54(a)(5)
also state that “An institution or the Secretary may require an
applicant to verify any data elements that the institution or the
Secretary specifies.”
The college financial aid administrator is
required to request documentation if he or she believes that the
information reported on the FAFSA is inaccurate. For example, the
regulations at 34 CFR 668.54(a)(3) state “If an institution has
reason to believe that any information on an application used to
calculate an EFC is inaccurate, it shall require the applicant to
verify the information that it has reason to believe is inaccurate.”
The regulations at 34 CFR 668.16(f) require colleges to have an
adequate system for identifying and resolving discrepancies in all the
information available to the college about a financial aid applicant,
including discrepancies between the income tax returns and the FAFSA.
If the application fails to provide the documentation within a
reasonable time period as specified by the college, the regulations at
34 CFR 668.60(b)(1) and 34 CFR 668.60(c)(2) prohibit the college from
disbursing any further federal student aid to the student, including
grants, loans and student employment. The student will also be
required to repay any federal student aid already disbursed. The
regulations at 34 CFR 668.60(d) also preclude processing any
subsequent year’s FAFSAs until the applicant provides the requested
documentation.
Source: Fastweb
How Can One Shelter Parent Assets on the FAFSA?
My daughter is going to college next year. We have to file the
FAFSA in October. We have money in our savings account that we
saved for emergency reasons and some for my daughter’s college. Will
this affect her chance in getting grants or loans? What should we do?
— G.N.
Money in a savings account counts as an asset on the Free Application
for Federal Student Aid (FAFSA) and may affect eligibility for
need-based student financial aid.
Most personal finance experts recommend keeping 3 to 6 months salary
in an
emergency or rainy day fund.
The size of the emergency fund is based on the average duration of
unemployment. During the current economic downturn, some people
recommended increasing the size of the emergency fund to 6 to 12
months salary.
The FAFSA does not have an exclusion for money in an emergency
fund. This is in contrast with the CSS Financial Aid PROFILE Form,
which subtracts an allowance for emergency reserves from assets. The
PROFILE is a supplemental form used by about 250 mostly private
colleges for awarding their own institutional aid funds. This is one
of the few areas in which an institutional need analysis formula may
yield a lower expected family contribution than the federal need
analysis methodology.
Despite the lack of an exclusion for emergency funds on the FAFSA, the
impact of parent assets on the student’s eligibility for need-based
aid is often small. If the parents qualify for the simplified needs
test, all assets will be disregarded on the FAFSA. To be eligible for
the simplified needs test, the parents’ adjusted gross income must be
less than $50,000 and the parents must have been eligible to file an
IRS Form 1040A or 1040EZ. (There are other ways of qualifying for the
simplified needs test, such as by qualifying for certain means-tested
federal benefit programs.) Even if the family does not qualify for the
simplified needs test, the FAFSA ignores the net worth of
the family’s principal place of residence, the value of any small
businesses owned and controlled by the family, and assets in qualified
retirement plan accounts. There is also an asset protection allowance
based on the age of the older parent that shelters about $40,000 to
$50,000 of parent assets for most parents. (The asset protection
allowance is based on the present cost of an annuity which would, at
retirement, supplement Social Security benefit payments to a moderate
living standard. The asset protection allowance can vary significantly
from one year to the next based on changes in the Consumer Price
Index.) Any remaining reportable parent assets are assessed according
to a bracketed scale, with a top bracket of 5.64 percent.
Approaches to Sheltering Money Often Backfire
There are ways of reducing the impact of parent assets to zero, but
each method has its own flaws. Most approaches involve saving or
investing the money in a non-reportable asset, such as a qualified
retirement plan account. (Investing the money in a small business or
using it to pay down the mortgage on the family home may work for
federal and state student aid, but not for money from the college’s
own need-based financial aid funds.)
The flaws in these approaches do not make them suitable solutions for
sheltering an emergency fund.
One approach is to save the money in a Roth IRA, which is not reported
as an asset on the FAFSA. Given the low annual
contribution limits on a Roth IRA, using this strategy will take
several years to implement. So long as one does not take a
distribution from the Roth IRA while the student is enrolled in
college, it will have no impact on need-based aid eligibility. But the
family cannot take any distributions from the Roth IRA, not
even a tax-free return of contributions. A tax-free return of
contributions will be reported as untaxed income on the
FAFSA. Regardless of whether the distribution is taxable or not, it
will reduce aid eligibility by as much as half the distribution
amount.
Another approach involves saving the money in a whole life or cash
value life insurance policy. These are not reported as assets on the
FAFSA because they are treated like qualified retirement plan
accounts. (Note, however, that there has been so much abuse of this
provision that the favorable treatment of these life insurance
policies may be eliminated in the future.) Any distributions from
such a life insurance policy will count as untaxed income on the
FAFSA, and may also involve high surrender charges. One could borrow
from the life insurance policy’s cash balance, but then the interest
payments merely substitute for the income the money would have earned
had it remained invested. Any unpaid interest will be added to the
loan balance, causing the borrower to be charged interest on
interest. This accrued but unpaid interest will eventually be treated
as income by the IRS. The interest payments also cannot be deducted on
the borrower’s federal income tax return, unlike the interest on
student and parent education loans. Even if the family does not take a
distribution or loan from the cash balance, the return on investment
after commissions and expenses is lousy, among the worst available. These
products are more to the benefit of the salesperson than to the
insured.
Both of these approaches suffer from a critical flaw, in that they
tend to limit access to the investment. A rainy day fund must be saved
in an easy-to-access liquid form, such as a savings account or money
market account. If an emergency arises, the family will need quick
access to the money. Most methods of sheltering money from need
analysis are not very liquid and will result in a significant penalty
by reducing the student’s eligibility for need-based financial
aid. This will hurt the family even further at a time of severe
financial distress.
Source: Fastweb
How to Minimize the Impact of a Student's Brokerage Account on Financial Aid
We have an UTMA mutual fund for our son who is a senior in high
school (17 years old). It is approximately $19,000 and was intended to
help pay for college costs. When we opened it we weren’t aware of the
impact it could have on financial aid. I realize it’s too late to fix
anything for his freshman year next year, but will it help him any for
his sophomore year if we take it out prior to the end of this tax
year? His other school money is in an educational IRA and won’t ding
him as much.
— D.G.
Custodial bank and brokerage accounts, such as UTMA and UGMA accounts,
are treated as a student asset on the Free Application for Federal
Student Aid (FAFSA). This has a more severe impact on eligibility for
need-based financial aid than parent assets. Student assets reduce aid
eligibility by 20 percent of the asset value. Some parent assets are
sheltered from the need analysis formula. The remaining parent assets
will reduce aid eligibility according to a bracketed scale, with a top
bracket of 5.64 percent.
Parents can fix such a situation by moving the student’s money into the
custodial version of a 529 college savings plan. Even though a
custodial 529 plan is technically the student’s asset, federal law
since 2009 has treated custodial 529 plan accounts as though they were
a parent asset on the FAFSA. (Prepaid tuition plans and Coverdell
education savings accounts are also treated as parent assets, but are
more likely to be affected by contribution limits.)
Parents can also spend the student’s money for the student’s benefit,
so long as the expenses are not normally considered parental
obligations, such as food, shelter and medical care. For example, if
the student will need a car or computer for college, the parent could
buy it with the student’s money. Parents can also spend the
student’s money for college costs, such as tuition and fees, room and
board, and books and supplies.
Since assets are reported on the FAFSA as of the application date,
parents can address the harsher treatment of student assets at any
time prior to filing the FAFSA, not just before the prior tax
year.
(Practically speaking, any changes in assets should occur at least a
month before filing the FAFSA. During verification, college financial
aid administrators may ask for copies of bank and brokerage account
statements, especially if the interest and dividend income on the
student’s income tax return is high compared with the student assets
reported on the FAFSA. Accordingly, any changes in the student’s
assets should occur early enough to be reflected in the most recent
statements prior to filing the FAFSA.)
However, contributions to a 529 college savings plan must be made with
cash, not securities. So to roll a student’s brokerage account into a
custodial 529 plan account, the parent must first liquidate the
brokerage account. If the stocks, bonds or mutual funds held in the
brokerage account have appreciated significantly, liquidating the
account will result in capital gains. Capital gains are treated as
income on the FAFSA. Student income received during the prior tax year
will reduce need-based aid eligibility by as much as half of the
amount of income. To prevent capital gains from affecting eligibility
for need-based financial aid, realize them before October 1 of the
junior year in high school.
Once the student is a senior in high school, however, there’s no room
to liquidate the brokerage account without having the capital gains
affect aid eligibility on the subsequent year’s FAFSA. It then becomes
a tradeoff between the treatment of the capital gains as income and
the treatment of the account as an asset. The student’s need-based
financial aid package will be reduced by 20 percent of the asset value
each year until the brokerage account is liquidated. If the money is
rolled over into a custodial 529 plan account, the financial aid
package will be reduced by up to 5.64 percent of the asset value each
subsequent year until the money is spent. When the brokerage account
is liquidated, the student’s need-based financial aid package during
the subsequent year will be reduced by up to 50 percent of the capital
gains.
Regardless of whether the money is spent on the student’s college
education directly or rolled over into a custodial 529 plan account,
the brokerage account must be liquidated. So realizing capital gains
is unavoidable. (One could avoid liquidating the brokerage account
until after the FAFSA is filed for the student’s senior year in
college. But then the student’s asset will reduce aid eligibility by
20 percent of the asset value each year, or a cumulative total of 80
percent of the asset value. That is not a cost-effective solution.)
This suggests that the optimal strategy for a student who is already a
high school senior is to liquidate the brokerage account immediately,
spend as much as possible of the student’s money on the student’s
education this year, and put the rest of the money in a custodial 529
plan account for subsequent years. The parent should not tap into any
of the parent’s money until the student’s assets are spent down to
zero.
Source: Fastweb
What Income is Listed on the FAFSA when Separated Parents File a Joint Tax Return?
I am praying that you may be able to advise me on the FAFSA
application. I am a senior in high school and will file the FAFSA in
October. I live with my mom. My dad moved out almost 2 years ago. As part
of my parents’ agreement, my dad is paying for our rent and
utilities. My mom and dad are still married, and not legally separated. They
plan to continue to file jointly for tax purposes. My mom is a
dislocated homemaker. I know that for FAFSA purposes, I do not have to
put down my dad’s info since he is not the custodial parent. But,
since they file jointly, do I still go ahead and list his info?
Since my dad filed jointly (he is the only one that works, and his
income is about $44,000, and we are a family of 5, not including
my dad, then we would be 6) doesn’t that mean that my mom filed too
and that I need to report my dad’s income as well?
— Blanca
A student’s parents do not need to have a legal separation or divorce
decree to be considered separated on the Free Application for Federal
Student Aid (FAFSA). An informal separation can count as a
separation for federal student aid purposes. In an informal
separation, one parent has left the household indefinitely. Living on
separate floors of the same house is not sufficient. The parents
cannot cohabit in an informal separation. Temporary absences for work,
education or military service also do not count.
IRS rules are different, so it is possible for a couple with an
informal separation to file federal income tax returns as married and
the FAFSA as separated. (Parents who are divorced or who have a legal
separation cannot file federal income tax returns as married. However,
if the divorce or legal separation occurred after the end of the tax
year but before filing the FAFSA, it is possible for there to be a
joint return in the prior tax year.)
If the parents are separated, only the parent with whom the student
lived the most during the 12 months ending on the FAFSA application
date is responsible for completing the FAFSA. The other parent’s
income and assets are not reported on the FAFSA. The other parent is
also not counted in household size.
If the student’s parents are separated but filed a joint federal
income tax return, the custodial parent will have to figure out their
share of the income and taxes paid on the joint return.
If the parents live in a community property state, the income is split
evenly. Otherwise the parent’s income should be based on their IRS W-2
and 1099 forms, plus any income that can be extracted from the joint
return. Income and dividends from joint accounts and investments
should be split evenly. Taxes paid can be calculated using one of two
methods. The preferred method is to use the IRS Tax Table or Tax Rate
Schedule to calculate the amount of taxes that would have been paid
had the parent filed a separate return, taking into account the
deductions and exemptions the parent could have claimed. The other
approach is to split the joint taxes paid in proportion to the
parent’s share of the joint AGI.
If the custodial parent receives any support from the non-custodial
parent, this should be reported as untaxed income on the
FAFSA. Likewise for any support received by the student from the
non-custodial parent. For example, if the non-custodial parent is
paying bills that the custodial parent would otherwise have to pay,
such as rent, utilities, insurance and food, that counts as untaxed
income to the custodial parent.
Parents who are separated but file a joint federal income tax return
will not be able to use the IRS Data Retrieval Tool to transfer
information from the federal income tax return to the FAFSA. Such a
FAFSA is more likely to be selected for verification.
Source: Fastweb
