Shielding assets to get more college aid

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Q. It seems like the financial aid formulas can be manipulated by making a large principal prepayment on a primary residence in order to shift assets from the reportable to the non-reportable category. Are there rules that say that type of transfer can’t happen within a certain number of years before applying for financial aid?
— College-bound

A. Yours is a great question, and timely as students consider their early college acceptances and wait for the rest of the answers to come.

The FAFSA form, short for Free Application for Federal Student Aid, is the form required by all schools before your student will receive need-based aid and to be offered the Federal Direct Student Stafford loans, said David Slater, co-founder of College Benefits Research Group (CBRG) in Roseland.

The form asks specific questions of the college student. For dependent students, the form asks financial questions of the custodial parent.

Slater said the government uses a published algorithm to generate each family’s Expected Family Contribution, or EFC, which is based on their income, assets and number of students in college.

On the asset side, the form asks for the amount of cash, savings and checking accounts as well as the investments as of the time that the FAFSA is being filed, Slater said.

“The form specifically excludes only three items, which by default means that everything else is counted,” Slater said. “The three items are 1) the primary residence; 2) the value of life insurance; and 3) retirement plans.”

These are a couple of FAFSA questions:

90. As of today, what is your parents’ total current balance of cash, savings, and checking accounts? Don’t include student financial aid.

91. As of today, what is the net worth of your parents’ investments, including real estate? Don’t include the home in which your parents live. See Notes page 9.

92. As of today, what is the net worth of your parents’ current businesses and/or investment farms? Don’t include a family farm or family business with 100 or fewer full-time or full-time equivalent employees. See Notes page 9.

“The `as of today’ does not ask what you had before or after,” Slater said. “It asks what you have in your accounts as of the day you are filing.”

Because paying off debt is not a taxable event, Slater said, you can spend down your assets any time prior to the filing date. This includes credit cards, loans, and mortgages.

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.