College_financial_aid_system
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about how all
00:00:06.280 | Families or most families can get more free money
00:00:10.400 | Financial aid for college now
00:00:12.940 | I have literally spent 10 hours trying to figure this out how to get more free
00:00:18.400 | financial aid for college in terms of grants and scholarships and
00:00:21.680 | you should listen to this because
00:00:24.760 | College is crazy expensive and there are easily
00:00:29.880 | Many strategies to take to get free money and we all love free money
00:00:33.400 | But it's those families those people who plan ahead who are able to get the free money
00:00:39.680 | So if you have young kids the younger the better the more time you have to plan your life accordingly
00:00:46.880 | And I think you could get
00:00:48.880 | hundred grand two hundred grand maybe in
00:00:51.840 | Free money to send your kid to school and if that's the case you can afford better schools
00:00:58.240 | Because the better schools tend to be more stingy with their financial aid because they have so much demand
00:01:04.960 | But if you can figure out how to work the FAFSA system, and if you can get into these universities
00:01:12.060 | You will likely get more money a lot of times
00:01:16.440 | we look at it only from our point of view as a student or as a parent and say oh we got to do as
00:01:21.480 | Best as we can in school so that we can get into all these great schools
00:01:26.280 | But the reality is there's also another side of the equation, which is the very competitive process of universities trying to recruit
00:01:32.960 | Students they want for four years to pay their tuition. It's a business
00:01:38.000 | Nonprofit or profit it's a business and it's competitive process in terms of rankings prestige
00:01:44.360 | Funding all that stuff
00:01:47.320 | And so if you have the ability to look at both sides of the equation for the college admissions process and the college financial aid process
00:01:55.680 | You're gonna do better than the family who doesn't plan who doesn't read about the process who doesn't listen to the strategies
00:02:03.160 | Who doesn't talk to?
00:02:05.160 | financial aid counselors
00:02:06.880 | This system is super complex and I'm trying to help you
00:02:10.940 | Save a lot of money for your children because the last thing you want to do is spend a ton of money on college
00:02:16.320 | For four or five years end up unemployed or underemployed with student debt
00:02:21.680 | So first, let me talk about a top-down philosophy of quote gaming the college financial aid system
00:02:29.400 | Gaming sounds bad, but in reality we all game the system. We don't cheat the system
00:02:35.680 | We game the system by understanding the rules of the game
00:02:39.140 | Once we understand the rules of the game
00:02:41.260 | We can more strategically play the game and win and the reality is colleges
00:02:47.680 | Themselves have been gaming the system as well in terms of raising their tuition rates
00:02:53.440 | So high faster than the rate of inflation over the past several decades that it's making college
00:02:59.220 | Unaffordable for the average middle-class family, you know
00:03:03.000 | we're talking 83,000 all in per year at a top private university or just any private university and
00:03:09.280 | About what 40,000 43,000 a year at a public university
00:03:15.540 | That's a lot of money folks. But what colleges are doing is they're raising their prices aggressively to signal quality to signal
00:03:23.760 | prestige and to get more people to come and then what they do is they kind of backdoor where they say well
00:03:30.720 | We accept your kid and we're gonna give you this quote merit
00:03:34.160 | Scholarship or need based aid to lower the net price. So it's you know having a high price
00:03:40.660 | You know you when you go shopping you see, you know, these fancy brands Gucci Prada, whatever
00:03:45.320 | very expensive but then
00:03:47.320 | Secretly they say hey, we'll give you 30% off 40% off 50% off. So it's a signaling effect to lure
00:03:55.080 | unassuming and assuming families to apply to their colleges and let's say the application fee is
00:04:01.960 | What $100 and a hundred thousand people apply?
00:04:05.500 | Well, that's a lot of application fee money
00:04:08.660 | And if the acceptance rate is 5% 10% 15% 20%
00:04:13.360 | well, they get to keep a lot of that and a lot of the families are therefore
00:04:18.000 | SOL and then there's the common app where a lot of families are just applying to many colleges at once
00:04:25.600 | Because they just have to check the box check check check check check and apply
00:04:29.080 | Yeah, you might have to tailor your essay accordingly
00:04:31.840 | but the whole process has brought in way more demand and yet the price of college has gone up crazy and
00:04:41.240 | Higher-education is largely free. Thanks to the internet. Meanwhile
00:04:44.720 | Meritocracy is kind of a hazy hazy area now in the past used to be top grades
00:04:52.840 | Top SAT scores top ACT scores top extracurricular activities and you'll get into the college of your choice with aid
00:05:00.320 | now
00:05:02.000 | Colleges, you know are picking and choosing who gets to enter and who doesn't and the world is not fair
00:05:09.220 | So again, if you can prepare the more you can learn about the financial aid system the better and you've definitely got to read my post
00:05:17.040 | on
00:05:18.200 | Gaming the college financial aid system. Alright, so after doing tons of research
00:05:22.920 | speaking to parents speaking to financial aid counselors reading books and more there is this thing I call the
00:05:30.840 | 300,000 income and
00:05:33.920 | 300,000 asset per child guideline in other words if your household makes up to
00:05:40.020 | $300,000 and if you have less than
00:05:42.700 | $200,000 in assets per child
00:05:46.380 | outside of your taxed advantage retirement accounts like 401k Roth IRA
00:05:52.700 | Then you have a chance to get free money good financial aid in terms of grants and scholarships
00:06:00.780 | if your household makes over three hundred thousand dollars, you know, that's like a top 10% income and
00:06:06.380 | If your assets are more than two hundred thousand per child
00:06:10.100 | Well, you're gonna have a very difficult time getting that free money and you're gonna have to go that merit aid route
00:06:16.100 | But the good thing about the merit aid route is that a lot of colleges are
00:06:20.020 | Couching or disguising need based aid as merit aid they call it merit based aid instead
00:06:27.740 | Because it sounds better
00:06:28.860 | So if you're trying to woo that student to join your university to pay whatever for four years
00:06:35.380 | If you say good job, we like you. We love you. Here's some merit aid. It just sounds better and feels better
00:06:42.580 | So it's really smart
00:06:44.580 | marketing smart strategy for schools to utilize
00:06:48.040 | All right, so given roughly 90% of households make less than three hundred thousand dollars
00:06:54.300 | Learning the college financial aid system is important now
00:06:58.700 | The bottom line is you want to make yourself look as poor as possible on the FAFSA
00:07:05.020 | Form to get as much free money as possible
00:07:09.460 | So there are four components to the FAFSA form
00:07:13.340 | There's the parental income
00:07:15.860 | parental assets
00:07:17.460 | student income
00:07:19.060 | Student assets and the idea is once you input all this stuff into the form. It'll spit out an expected
00:07:26.100 | parental contribution or
00:07:28.540 | EPC the higher the expected parental contribution
00:07:32.900 | the less free money or the less good financial aid you'll get because the formula is the
00:07:39.500 | annual cost of going to college
00:07:41.980 | Minus the EPC and that difference is the aid you'll get
00:07:48.500 | Hopefully in terms of good financial aid, but sometimes it's work-study and sometimes it's student loans, but student loans
00:07:55.060 | It's not really aid. It's just you know, you got to pay that back. So it's I don't think it counts
00:08:00.260 | All right. Now, let's look at each of the four
00:08:03.700 | Contributing factors to paying for college first is the parental income
00:08:09.580 | It's the most heavily assessed at 40% for most families
00:08:14.380 | so in other words if you make a thousand dollars of income, it'll raise your
00:08:20.060 | EFC or EPC by four hundred seventy dollars the more you make
00:08:25.580 | The higher your EPC the less money you're gonna have
00:08:30.260 | So the clear strategy is to earn as little and adjusted gross income as possible
00:08:36.420 | For two to four years before your child attends college now, that's hard to do if you have a day job
00:08:42.500 | It's easier to do if you own a business. It's easier to do if you're a freelancer, right?
00:08:47.300 | You just don't work as much
00:08:48.740 | however
00:08:49.380 | Let's say you're 50 years old and you've been working for 28 years after college yourself
00:08:54.780 | And you're kind of burned out and your kid is gonna go to college in two years time
00:08:59.960 | Well, if you've ever wanted to take a sabbatical if you've ever wanted to retire early or just take a break for two years
00:09:08.020 | This is the time to do it to get your adjusted gross income as low as possible
00:09:13.260 | And once you're in that low marginal tax bracket, you should also do a Roth IRA conversion
00:09:19.620 | Especially if you're not going to go back to work. All right, the second variable for expected parental contribution are
00:09:25.780 | the parents assets parents assets don't count as much as the income only
00:09:32.020 | 5.64% of parents assets count towards
00:09:37.900 | The expected family contribution and these assets are assets outside of your tax advantaged
00:09:45.100 | retirement accounts in other words
00:09:47.380 | You can have 3 million 5 million in your 401k or Roth IRA or traditional IRA and that doesn't count
00:09:55.860 | towards your FAFSA towards
00:09:58.860 | EPC so let's discuss what are the assets that don't count when filing for your FAFSA
00:10:06.900 | They are retirement accounts such as 401k IRA Roth IRA 403b
00:10:12.060 | HSA accounts term life insurance whole life insurance
00:10:17.220 | annuities
00:10:19.260 | 529 plans owned by grandparents a
00:10:21.700 | Small business you own so long as you own more than 50% of it and have less than 100 employees a
00:10:28.940 | Family farm you live on and operate and your primary
00:10:33.860 | Residence all of these things don't count towards your FAFSA. Therefore you want to build as much wealth into these
00:10:41.420 | assets and
00:10:43.980 | Less in these assets. Okay. So here are the assets that do count in terms of your FAFSA calculation
00:10:50.940 | They are your checking and savings accounts all five to nine plans owned by the parents the brokerage and taxable accounts
00:10:59.260 | investment property equity
00:11:02.180 | second home equity vacation home equity
00:11:04.600 | vested stock options trust funds your elderly relatives bank account where you are a joint owner
00:11:11.620 | cryptocurrencies and
00:11:14.700 | UGMA's and UTM a's so you can see how the sooner you understand
00:11:20.640 | How to work the college financial aid system or understand how it works in general the easier it is to
00:11:28.260 | Asset allocate your net worth to look better on the FAFSA application to get free money for college
00:11:34.780 | And you know the vast majority of families don't do the research. They're not listening to this podcast
00:11:41.420 | They're not reading financial samurai. They're not reading books
00:11:44.740 | They're just kind of winging it and then you know 18 years after their kid is born and they're like, well, wait a minute
00:11:50.820 | Why didn't I do this or why did I do that?
00:11:53.900 | So thinking is free being strategic is free
00:11:56.740 | And this is something I love to do trying to anticipate the future on all the variables
00:12:01.080 | And this is why the financial samurai community is so good
00:12:03.340 | Because there are plenty of readers who have college age or older kids and they have shared their strategies for getting
00:12:09.940 | Free money for college as well in the comment section on financial samurai comm now
00:12:14.500 | It's worth talking about the five point six four percent figure
00:12:19.380 | That's the percentage figure of what counts for assets for parents and the assets that are included in the FAFSA
00:12:27.300 | Calculation if you think about that that is so low
00:12:30.700 | That means the government believes the average American family only saves five point six four percent of their income
00:12:38.420 | Over time so that also means that the government can't afford to screw up
00:12:43.660 | social security
00:12:45.860 | Because if the average person only saves five point six four percent
00:12:49.040 | Well by the time they're in their 60s and 70s
00:12:51.540 | They probably won't have that much to afford to live comfortably in retirement
00:12:56.360 | So that's a positive way to think about it
00:12:58.540 | The other positive is to understand how low of a savings hurdle there is in America
00:13:04.540 | Is really that the average five point six four percent?
00:13:07.380 | It actually is because if you look at the st. Louis Fred data on the average or median saving rate over time
00:13:14.260 | It's really in single digits. It's gone as low as like zero to thirty what six percent in March 2020 during the pandemic
00:13:21.780 | It shows that the average American can save more if we want to however, we choose to yolo it
00:13:29.060 | We choose to spend all our money and that's not such a bad thing
00:13:31.700 | But it is a bad thing if you end up with too little money in retirement and you got to work at a job
00:13:35.940 | That you hate forever, right? So it's pros and cons
00:13:38.740 | So it's something to think about as you go about saving and investing
00:13:43.500 | It's easy. I think to beat the average and if you can beat the average, I think you're gonna have above average
00:13:49.540 | Lifestyle. All right. Now, let's talk about the third variable for expected parental contribution and that's the student income
00:13:57.820 | This is where it gets kind of interesting
00:14:00.500 | So the government says that 50% of the students income will go towards the FAFSA calculation
00:14:08.420 | So that's very high 50% I mean the kids are only making what thousands of dollars maybe up to
00:14:15.540 | 10,000 15,000 dollars as students. I mean, these are the most
00:14:19.140 | Industrious students who are making minimum wage. So it is a penalty
00:14:24.340 | It's a penalty if the student is making a lot of income
00:14:28.540 | And so strategically what you want to do is you want to earn let's say the maximum
00:14:34.140 | Roth IRA contribution of six thousand five hundred
00:14:38.060 | Or actually up to the allowance. So the government allows an allowance of sixty eight hundred you can make so whatever you make minus
00:14:45.940 | 6,800 is an amount as an amount and then the government multiplies that by 50%
00:14:51.740 | To calculate the students expected parental contribution if that's confusing. Let me use an example. Let's say the student makes
00:14:59.900 | $7,000 working at McDonald's for minimum wage and then the allowance is sixty eight hundred
00:15:07.300 | Well, the net amount is two hundred dollars two hundred times fifty percent is a hundred dollars
00:15:12.100 | That is the students expected contribution
00:15:15.340 | So actually that's not a lot at all and if you can earn that money
00:15:19.620 | the best way to do so with that money is to contribute the maximum to a Roth IRA so it can
00:15:25.840 | compound tax-free
00:15:28.220 | Withdraw tax-free and you didn't have to pay any taxes on it in the first place because the standard deduction is
00:15:34.900 | 13,850 now the final variable to calculate the
00:15:40.020 | EPC is the students assets
00:15:43.140 | students assets basically income minus taxes and spending then you just put in your checking or savings account or
00:15:50.660 | taxable brokerage account
00:15:52.780 | The good thing is I'm assuming most students don't have huge assets because they're students right even if they work side jobs
00:15:59.340 | They've got the income allowance. They've they want to spend their money and live life as teenagers or college students
00:16:05.940 | But it's basically 20% of student assets count towards the FAFSA calculation
00:16:12.380 | EPC contribution and strategically I would encourage all our kids to work hard
00:16:19.780 | Make up to the income allowance put all that money into a Roth IRA and any income above that
00:16:27.460 | I would just spend it or you can start a business or you can go travel or buy whatever you want
00:16:34.260 | You know that amount of money
00:16:35.900 | I think it's very valuable to spend now when you don't have a lot of money because you're still saving a lot in your Roth IRA
00:16:42.340 | Which is great for fundamentals and future growth. Alright, so now, you know the four variables and what to do
00:16:48.940 | well, what if you are a prodigious saver you've been saving and investing since you are 15 years old and you have
00:16:56.500 | Way more assets than two hundred thousand per child outside of your retirement accounts
00:17:03.180 | What are you gonna do?
00:17:04.300 | Well, here is what I would do and this is this is for you to try to get free money for college
00:17:10.260 | But there's also a cost to it as well
00:17:12.500 | so the first thing you can do is get all your money outside of your tax advantage retirement accounts and
00:17:19.500 | Spend it spend it on life
00:17:21.780 | one of the things I've been talking about for a while is buying a sweet house in terms of
00:17:26.860 | Spending money on a house. You can spend hundreds of millions of dollars on a house
00:17:30.700 | That's really easy to do is just endless in terms of property
00:17:33.980 | Land, so if you want to buy a forever home or a nice house
00:17:38.420 | Well, you can probably buy one and spend all that money
00:17:41.940 | When you're a kid is a freshman sophomore in high school or maybe sooner and that's how you're gonna spend down
00:17:49.620 | That taxable brokerage account or your savings or checking money
00:17:53.660 | The other thing you want to do is spend money on expensive replaceable items such as a new roof
00:17:59.100 | Or maybe you want to remodel and get a dream kitchen that costs. I don't know fifty to a hundred thousand dollars
00:18:05.020 | Maybe you want to remodel every single bathroom in your house, which will cost
00:18:08.260 | fifteen to
00:18:11.020 | $35,000 each maybe you want to do some landscaping all this stuff and then if you like cars
00:18:17.580 | Well, we know that the average new car price is fifty thousand dollars now, but you know what you're 50 years old
00:18:24.260 | You know, you've grinded for almost 30 years. It's been tough being a parent saving money investing
00:18:29.980 | You are in a midlife crisis now, so maybe that Lamborghini or that Ferrari or Bentley?
00:18:36.100 | Looks pretty good
00:18:38.220 | 200 to 500 thousand dollars again our trade-offs you have to consider
00:18:43.060 | Are you really gonna spend two hundred thousand or three hundred thousand dollar car to get?
00:18:47.500 | Hundred thousand to two hundred thousand and free financial aid
00:18:51.540 | Maybe if you've really wanted that car, but of course everybody's different and you got to calculate
00:18:56.780 | these expenses to your
00:18:59.620 | Potential benefits now that we're really daydreaming about how to blow our money to get free financial aid
00:19:07.140 | I'm thinking maybe a six month around the world trip on a cruise, you know a double cabin
00:19:13.660 | Ocean view and balcony. I mean imagine for six months gonna see the entire world with your family
00:19:20.180 | Maybe you I don't know take a gap year or you just I don't know summer vacation at least two and a half three months
00:19:26.340 | That experience is probably priceless and that experience might cost
00:19:31.980 | Fifty to a hundred thousand per person. Okay, I'm daydreaming here
00:19:36.020 | but you get the idea the idea is to spend down as much of your cash and your taxable brokerage account money as
00:19:43.900 | Possible just be careful not to spend so much money that you're left with a liquidity crunch
00:19:50.780 | So now you know about the framework for gaming the college financial aid system
00:19:55.980 | And I think you can agree that it's really not gaming the system. It's really more about
00:20:00.500 | Understanding the system where to move those net worth pieces
00:20:04.900 | So you look the best possible on the FAFSA if you are someone who is looking to retire early
00:20:11.340 | Getting free money for college is going to be difficult
00:20:14.540 | Because you're trying to build as large as possible your taxable brokerage portfolio and your rental property portfolio
00:20:22.180 | And all these other things that can spit out
00:20:25.300 | passive investment income so you can leave your job early and
00:20:29.260 | survive without having to work or at least until fifty nine and a half or
00:20:33.580 | When you want to collect Social Security, this means by default you're probably gonna have way more than
00:20:39.940 | $200,000 per kid because two hundred thousand dollars at a four percent withdrawal rate is only eight thousand dollars and you're not gonna be able
00:20:48.780 | to live off
00:20:49.980 | $8,000 a year. Let's say the minimum you can live off is
00:20:53.980 | $8,000 a year. So with a four percent withdrawal rate you need
00:20:57.460 | $750,000 in
00:21:01.420 | Taxable brokerage account or rental properties or other assets and given I said you can't have much more than
00:21:07.620 | $200,000 in assets non retirement assets per kid
00:21:12.540 | Well, you better have at least I guess four kids. Otherwise, you're just not gonna get that free money
00:21:19.060 | So like with so many things in life, there are trade-offs good and bad if you retire early you have more freedom
00:21:25.420 | however, you're gonna get penalized when your kids apply for financial aid and
00:21:30.540 | That's just the way it is trade-offs. All right
00:21:34.300 | Let me leave you with how to really game the college financial aid system
00:21:39.580 | According to Michael he has three tips to talk about
00:21:43.380 | One get divorced on paper and place the children in the home of the parent with little to no income
00:21:51.260 | Uh-huh to have the child get married which would qualify them as independent from parents
00:21:58.100 | So family assets and income aren't counted at all
00:22:01.460 | three
00:22:03.820 | various self-identifying racial sexual gender characteristics
00:22:08.060 | So let's talk about this for a little bit the first idea
00:22:12.060 | Getting divorced is the most feasible, you know marriage for a lot of people is I don't know
00:22:18.260 | there's like a marriage tax penalty for a lot of income earners, right if you earn a particularly high income and you
00:22:24.700 | Marry another person with a particularly high income
00:22:27.220 | You're gonna in the past used to pay like five ten fifteen thousand a year and extra
00:22:33.060 | Taxes now that went away in about 2017
00:22:37.460 | So unless your household income is above about five hundred thousand dollars, you're not gonna pay the marriage penalty tax
00:22:43.140 | but this strategy of getting divorce on paper is
00:22:47.260 | It's gonna probably work and divorce is not uncommon. The divorce rate is 40 to 50 percent
00:22:53.700 | So let's move on to action point number two
00:22:57.940 | Have your children get married so the parents income and assets aren't included
00:23:05.500 | Well, that's gonna be hard
00:23:07.420 | Are you really gonna get your 18 year old to marry someone because that's the legal minimum age in many states
00:23:14.460 | So 18 you get married and then you basically have no income and very little in assets
00:23:21.620 | So you're gonna look great on the FAFSA
00:23:24.060 | But what you would have to do is probably get married and then I guess wait a year
00:23:28.940 | Defer going to college for one year, which is not bad. It's very common in places like Australia
00:23:33.920 | It's called like the walkabout where you go travel and explore the same thing in Europe a lot of Europeans after high school
00:23:39.900 | They just explore the world for a year and see the world mature gain better perspectives
00:23:45.900 | So that's not bad
00:23:47.340 | But come on, are you really gonna force your kid to get married and is your kid really gonna go along with this plan?
00:23:54.020 | Mmm, kind of tough. All right
00:23:56.460 | well
00:23:56.860 | the final way to really game the financial aid system is to identify as a person who is
00:24:03.900 | very much
00:24:05.340 | underrepresented whether that's race or
00:24:07.340 | Sexuality or whatever it is that college or society deems is in need of help
00:24:14.620 | There's just one problem with this strategy
00:24:17.620 | It's hard to change who we are and I believe we should all be proud of who we are at the same time
00:24:23.860 | we should understand the socio-economic landscape the political landscape and
00:24:29.940 | See what is going on in terms of who gets a better chance to get in where who gets more money?
00:24:37.700 | Who gets more assistance and if you happen to identify as one of those people?
00:24:42.380 | Well, I think you have a right to identify as one of those people who gets to determine who you are
00:24:49.140 | Except for you and there's one love for everybody. All right, everybody
00:24:54.380 | I hope you enjoyed this episode if you have experience with the FAFSA
00:24:59.340 | College financial aid system. I'd love to hear it in a comment in the post shoot me an email
00:25:04.780 | Leave a review on financial samurai podcast. It's always great to hear different perspectives different strategies
00:25:12.740 | Because at the end of the day, we just want to save money
00:25:15.140 | We want to make money and we want to secure our future and our children's futures as well to stay in touch
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