LOS ANGELES, Jan 27 (Reuters) – Spiraling college costs can
tempt families to stretch the truth trying to get more financial
aid. These methods carry significant risks and may not even
work.
There are legitimate ways to get better offers (see),
but here’s what you want to avoid:
1. Lying about income
Tempted to “forget” an income source or report lower numbers
than what you actually earned? The chances of getting caught are
fairly high.
Colleges can, and do, compare the numbers you submit with
the transcript of your most recent IRS tax return.
In the past, the U.S. Department of Education required
colleges to verify 30 percent of the Free Application for
Federal Student Aid (FAFSA) submitted, but some choose to verify
100 percent, said financial aid expert Mark Kantrowitz of
Edvisors, a Las Vegas-based education resource network.
Going forward, the department is transitioning to a
computerized risk model to flag potential problems that will
require applicants to provide further proof if there are any
discrepancies.
Just as lying to the Internal Revenue Service carries
substantial penalties, so too does lying on a FAFSA – a fine of
up to $20,000 and up to five years in prison.
2. Hiding assets
Many attempts to keep wealth hidden from the financial aid
process are pointless, said Kantrowitz, who co-authored the book
“Filing the FAFSA.”
Parents with substantial assets often also have substantial
incomes, and high incomes are often enough to rule out getting
need-based aid.
Also, assets tend to leave a paper trail. If you cash out
stocks to stuff money into your mattress, the capital gains will
show up on your tax return. Financial aid officers are pretty
good at spotting discrepancies and inconsistencies, and may ask
you to provide several years’ worth of tax returns and account
statements if they smell something fishy, said Kantrowitz.
Keep in mind that retirement assets are never counted in
financial aid formulas, and a certain amount of non-retirement
assets are also sheltered from inclusion by the FAFSA when
determining your expected family contribution.
The vast majority of families won’t have enough assets to
affect their chances of getting financial aid, said college
expert Lynn O’Shaughnessy of San Diego, author of the book and
Web site “The College Solution.”
3. Buying annuities and life insurance to reduce assets
Insurance salespeople may pitch their products as ways to
make non-retirement assets “disappear,” said college planner
Todd Weaver of Strategies for College, a Hanover, N.H.-based
consulting firm. Some go a step further and suggest you borrow
against your home equity to invest in annuities or insurance
-which is rarely a good idea, since the federal financial aid
formula ignores home equity and private colleges typically cap
how much equity they count.
“People get lured into thinking that assets are the driving
factor” in financial aid offers, Weaver said. “They’re not. It’s
income.”
Where life insurance is concerned, it’s true that financial
aid formulas don’t count the cash value, said college consultant
Deborah Fox of San Diego-based Fox College Funding. But
cash-value policies can be expensive and aren’t a smart purchase
if you don’t otherwise need the coverage, she said.
Annuities also can be expensive and come with surrender
charges that make it costly to get your money back. While
they’re not counted in the federal financial aid formula,
private colleges may count them against you.
“More colleges are counting them,” Fox said. “Annuities are
not necessarily a safe haven.”
Families considering either product should first use an
“estimated family contribution” calculator, like the one atas well as colleges’ net price calculators to see if the
purchase would make a difference. Then they should run the idea
past a fee-only financial planner, a certified public accountant
or another financial adviser who doesn’t stand to make a
commission on the deal.
4. Saving in Grandma’s name
Assets in the student’s name count heavily against financial
aid offers. Assets in the parent’s name count much less heavily.
Assets in the names of grandparents or other non-custodial
relatives don’t count at all, which is why some people have
Grandma open 529 college savings plans for the grandchildren.
That may work okay the first year for financial aid, but
withdrawals from that college savings plan to pay for college
will count as a “student resource” that will significantly
impact the next year’s financial aid offer, said CPA Joe Hurley,
founder of SavingForCollege.com.
By contrast, withdrawals from parent- or student-owned 529
plans usually aren’t reported as income for financial aid
purposes. Typically, Hurley said, it’s best to save in the
parents’ names.