We get asked this question a lot and for good reason. The cost of an education in increasing at a tremendous pace and families are trying to determine how they can qualify for more financial aid. The short answer is that life insurance cash values are not counted under any of the aid calculations and some, not all, colleges will exclude money in non-qualified annuities as well. That being said, you should first answer three questions before even thinking about investing in a life insurance or annuity product.
Do you qualify for need-based financial aid in the first place?
In order to qualify for need-based financial aid you will need to calculate your Expected Family Contribution (EFC) and subtract it from the cost of attendance (Cost of Attendance – EFC = Financial Need). Your EFC is the minimum amount a college will expect you to contribute each year towards the cost of education. If the cost of attendance is greater than your EFC then you will qualify for need-based aid.
EFC is based on the assets and income of the family and is also driven by the number of children in college at once. Certain assets are excluded from the EFC calculation and allowances will help shelter some of your assets and income as well. Since colleges now use the “Prior-Prior” methodology you will need to be proactive in your financial aid planning.
If you determine that you will not qualify for need-based aid based on income alone, then it will not matter if you shelter 100% of your assets.
Where will you be applying to college?
The college you choose will play a pivotal role in determining your EFC. The reason being is that some colleges use different aid applications which might result in a much higher EFC. And although life insurance cash values are notcounted under any of the aid calculations some colleges will include non-qualified annuities. Before calculating your EFC, students should check the aid section of each college’s admissions materials in order to find out which aid applications are required.
Does the investment make sense beyond increasing your aid eligibility?
Just because you qualify for need-based aid does not mean that you will get it. Most colleges will publish a statistic called “Percentage of Need Met” that will help estimate your EFC. And even if a college meets your financial need it might be with student loans.
The point is that financial aid should not be the only driver in your decision. Most annuities and life insurance products come with high expenses and liquidity restrictions. Beyond financial aid considerations you should also ask, “Will this investment help me get closer to achieving my financial objectives?”
College is an enormous investment and you need to be proactive in your planning. Over 40% of student loan borrowers 65 and over are currently in default. Borrowing beyond your means is not the answer. Protect your retirement and plan accordingly.
About College Corner: Our goal here is to help you develop your best college planning strategy by addressing the topics of tax planning, saving, financial aid optimization, college selection and personal finances. If you have a question, please send it our way.