Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about how all Families or most families can get more free money Financial aid for college now I have literally spent 10 hours trying to figure this out how to get more free financial aid for college in terms of grants and scholarships and you should listen to this because College is crazy expensive and there are easily Many strategies to take to get free money and we all love free money But it's those families those people who plan ahead who are able to get the free money So if you have young kids the younger the better the more time you have to plan your life accordingly And I think you could get hundred grand two hundred grand maybe in Free money to send your kid to school and if that's the case you can afford better schools Because the better schools tend to be more stingy with their financial aid because they have so much demand But if you can figure out how to work the FAFSA system, and if you can get into these universities You will likely get more money a lot of times 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 Best as we can in school so that we can get into all these great schools But the reality is there's also another side of the equation, which is the very competitive process of universities trying to recruit Students they want for four years to pay their tuition.

It's a business Nonprofit or profit it's a business and it's competitive process in terms of rankings prestige Funding all that stuff 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 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 Who doesn't talk to?

financial aid counselors This system is super complex and I'm trying to help you Save a lot of money for your children because the last thing you want to do is spend a ton of money on college For four or five years end up unemployed or underemployed with student debt So first, let me talk about a top-down philosophy of quote gaming the college financial aid system Gaming sounds bad, but in reality we all game the system.

We don't cheat the system We game the system by understanding the rules of the game Once we understand the rules of the game We can more strategically play the game and win and the reality is colleges Themselves have been gaming the system as well in terms of raising their tuition rates So high faster than the rate of inflation over the past several decades that it's making college Unaffordable for the average middle-class family, you know we're talking 83,000 all in per year at a top private university or just any private university and About what 40,000 43,000 a year at a public university That's a lot of money folks.

But what colleges are doing is they're raising their prices aggressively to signal quality to signal prestige and to get more people to come and then what they do is they kind of backdoor where they say well We accept your kid and we're gonna give you this quote merit Scholarship or need based aid to lower the net price.

So it's you know having a high price You know you when you go shopping you see, you know, these fancy brands Gucci Prada, whatever very expensive but then Secretly they say hey, we'll give you 30% off 40% off 50% off. So it's a signaling effect to lure unassuming and assuming families to apply to their colleges and let's say the application fee is What $100 and a hundred thousand people apply?

Well, that's a lot of application fee money And if the acceptance rate is 5% 10% 15% 20% well, they get to keep a lot of that and a lot of the families are therefore SOL and then there's the common app where a lot of families are just applying to many colleges at once Because they just have to check the box check check check check check and apply Yeah, you might have to tailor your essay accordingly but the whole process has brought in way more demand and yet the price of college has gone up crazy and Higher-education is largely free.

Thanks to the internet. Meanwhile Meritocracy is kind of a hazy hazy area now in the past used to be top grades Top SAT scores top ACT scores top extracurricular activities and you'll get into the college of your choice with aid now Colleges, you know are picking and choosing who gets to enter and who doesn't and the world is not fair 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 on Gaming the college financial aid system.

Alright, so after doing tons of research speaking to parents speaking to financial aid counselors reading books and more there is this thing I call the 300,000 income and 300,000 asset per child guideline in other words if your household makes up to $300,000 and if you have less than $200,000 in assets per child outside of your taxed advantage retirement accounts like 401k Roth IRA Then you have a chance to get free money good financial aid in terms of grants and scholarships if your household makes over three hundred thousand dollars, you know, that's like a top 10% income and If your assets are more than two hundred thousand per child Well, you're gonna have a very difficult time getting that free money and you're gonna have to go that merit aid route But the good thing about the merit aid route is that a lot of colleges are Couching or disguising need based aid as merit aid they call it merit based aid instead Because it sounds better So if you're trying to woo that student to join your university to pay whatever for four years If you say good job, we like you.

We love you. Here's some merit aid. It just sounds better and feels better So it's really smart marketing smart strategy for schools to utilize All right, so given roughly 90% of households make less than three hundred thousand dollars Learning the college financial aid system is important now The bottom line is you want to make yourself look as poor as possible on the FAFSA Form to get as much free money as possible So there are four components to the FAFSA form There's the parental income parental assets student income Student assets and the idea is once you input all this stuff into the form.

It'll spit out an expected parental contribution or EPC the higher the expected parental contribution the less free money or the less good financial aid you'll get because the formula is the annual cost of going to college Minus the EPC and that difference is the aid you'll get Hopefully in terms of good financial aid, but sometimes it's work-study and sometimes it's student loans, but student loans 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 All right. Now, let's look at each of the four Contributing factors to paying for college first is the parental income It's the most heavily assessed at 40% for most families so in other words if you make a thousand dollars of income, it'll raise your EFC or EPC by four hundred seventy dollars the more you make The higher your EPC the less money you're gonna have So the clear strategy is to earn as little and adjusted gross income as possible For two to four years before your child attends college now, that's hard to do if you have a day job It's easier to do if you own a business.

It's easier to do if you're a freelancer, right? You just don't work as much however Let's say you're 50 years old and you've been working for 28 years after college yourself And you're kind of burned out and your kid is gonna go to college in two years time 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 This is the time to do it to get your adjusted gross income as low as possible And once you're in that low marginal tax bracket, you should also do a Roth IRA conversion Especially if you're not going to go back to work.

All right, the second variable for expected parental contribution are the parents assets parents assets don't count as much as the income only 5.64% of parents assets count towards The expected family contribution and these assets are assets outside of your tax advantaged retirement accounts in other words You can have 3 million 5 million in your 401k or Roth IRA or traditional IRA and that doesn't count towards your FAFSA towards EPC so let's discuss what are the assets that don't count when filing for your FAFSA They are retirement accounts such as 401k IRA Roth IRA 403b HSA accounts term life insurance whole life insurance annuities 529 plans owned by grandparents a Small business you own so long as you own more than 50% of it and have less than 100 employees a Family farm you live on and operate and your primary Residence all of these things don't count towards your FAFSA.

Therefore you want to build as much wealth into these assets and Less in these assets. Okay. So here are the assets that do count in terms of your FAFSA calculation They are your checking and savings accounts all five to nine plans owned by the parents the brokerage and taxable accounts investment property equity second home equity vacation home equity vested stock options trust funds your elderly relatives bank account where you are a joint owner cryptocurrencies and UGMA's and UTM a's so you can see how the sooner you understand How to work the college financial aid system or understand how it works in general the easier it is to Asset allocate your net worth to look better on the FAFSA application to get free money for college And you know the vast majority of families don't do the research.

They're not listening to this podcast They're not reading financial samurai. They're not reading books 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 Why didn't I do this or why did I do that? So thinking is free being strategic is free And this is something I love to do trying to anticipate the future on all the variables And this is why the financial samurai community is so good Because there are plenty of readers who have college age or older kids and they have shared their strategies for getting Free money for college as well in the comment section on financial samurai comm now It's worth talking about the five point six four percent figure That's the percentage figure of what counts for assets for parents and the assets that are included in the FAFSA Calculation if you think about that that is so low That means the government believes the average American family only saves five point six four percent of their income Over time so that also means that the government can't afford to screw up social security Because if the average person only saves five point six four percent Well by the time they're in their 60s and 70s They probably won't have that much to afford to live comfortably in retirement So that's a positive way to think about it The other positive is to understand how low of a savings hurdle there is in America Is really that the average five point six four percent?

It actually is because if you look at the st. Louis Fred data on the average or median saving rate over time 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 It shows that the average American can save more if we want to however, we choose to yolo it We choose to spend all our money and that's not such a bad thing But it is a bad thing if you end up with too little money in retirement and you got to work at a job That you hate forever, right?

So it's pros and cons So it's something to think about as you go about saving and investing It's easy. I think to beat the average and if you can beat the average, I think you're gonna have above average Lifestyle. All right. Now, let's talk about the third variable for expected parental contribution and that's the student income This is where it gets kind of interesting So the government says that 50% of the students income will go towards the FAFSA calculation So that's very high 50% I mean the kids are only making what thousands of dollars maybe up to 10,000 15,000 dollars as students.

I mean, these are the most Industrious students who are making minimum wage. So it is a penalty It's a penalty if the student is making a lot of income And so strategically what you want to do is you want to earn let's say the maximum Roth IRA contribution of six thousand five hundred Or actually up to the allowance.

So the government allows an allowance of sixty eight hundred you can make so whatever you make minus 6,800 is an amount as an amount and then the government multiplies that by 50% To calculate the students expected parental contribution if that's confusing. Let me use an example. Let's say the student makes $7,000 working at McDonald's for minimum wage and then the allowance is sixty eight hundred Well, the net amount is two hundred dollars two hundred times fifty percent is a hundred dollars That is the students expected contribution So actually that's not a lot at all and if you can earn that money the best way to do so with that money is to contribute the maximum to a Roth IRA so it can compound tax-free Withdraw tax-free and you didn't have to pay any taxes on it in the first place because the standard deduction is 13,850 now the final variable to calculate the EPC is the students assets students assets basically income minus taxes and spending then you just put in your checking or savings account or taxable brokerage account 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 They've got the income allowance.

They've they want to spend their money and live life as teenagers or college students But it's basically 20% of student assets count towards the FAFSA calculation EPC contribution and strategically I would encourage all our kids to work hard Make up to the income allowance put all that money into a Roth IRA and any income above that I would just spend it or you can start a business or you can go travel or buy whatever you want You know that amount of money 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 Which is great for fundamentals and future growth.

Alright, so now, you know the four variables and what to do well, what if you are a prodigious saver you've been saving and investing since you are 15 years old and you have Way more assets than two hundred thousand per child outside of your retirement accounts What are you gonna do?

Well, here is what I would do and this is this is for you to try to get free money for college But there's also a cost to it as well so the first thing you can do is get all your money outside of your tax advantage retirement accounts and Spend it spend it on life one of the things I've been talking about for a while is buying a sweet house in terms of Spending money on a house.

You can spend hundreds of millions of dollars on a house That's really easy to do is just endless in terms of property Land, so if you want to buy a forever home or a nice house Well, you can probably buy one and spend all that money When you're a kid is a freshman sophomore in high school or maybe sooner and that's how you're gonna spend down That taxable brokerage account or your savings or checking money The other thing you want to do is spend money on expensive replaceable items such as a new roof Or maybe you want to remodel and get a dream kitchen that costs.

I don't know fifty to a hundred thousand dollars Maybe you want to remodel every single bathroom in your house, which will cost fifteen to $35,000 each maybe you want to do some landscaping all this stuff and then if you like cars Well, we know that the average new car price is fifty thousand dollars now, but you know what you're 50 years old You know, you've grinded for almost 30 years.

It's been tough being a parent saving money investing You are in a midlife crisis now, so maybe that Lamborghini or that Ferrari or Bentley? Looks pretty good 200 to 500 thousand dollars again our trade-offs you have to consider Are you really gonna spend two hundred thousand or three hundred thousand dollar car to get?

Hundred thousand to two hundred thousand and free financial aid Maybe if you've really wanted that car, but of course everybody's different and you got to calculate these expenses to your Potential benefits now that we're really daydreaming about how to blow our money to get free financial aid I'm thinking maybe a six month around the world trip on a cruise, you know a double cabin Ocean view and balcony.

I mean imagine for six months gonna see the entire world with your family 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 That experience is probably priceless and that experience might cost Fifty to a hundred thousand per person.

Okay, I'm daydreaming here but you get the idea the idea is to spend down as much of your cash and your taxable brokerage account money as Possible just be careful not to spend so much money that you're left with a liquidity crunch So now you know about the framework for gaming the college financial aid system And I think you can agree that it's really not gaming the system.

It's really more about Understanding the system where to move those net worth pieces So you look the best possible on the FAFSA if you are someone who is looking to retire early Getting free money for college is going to be difficult Because you're trying to build as large as possible your taxable brokerage portfolio and your rental property portfolio And all these other things that can spit out passive investment income so you can leave your job early and survive without having to work or at least until fifty nine and a half or When you want to collect Social Security, this means by default you're probably gonna have way more than $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 to live off $8,000 a year.

Let's say the minimum you can live off is $8,000 a year. So with a four percent withdrawal rate you need $750,000 in Taxable brokerage account or rental properties or other assets and given I said you can't have much more than $200,000 in assets non retirement assets per kid Well, you better have at least I guess four kids.

Otherwise, you're just not gonna get that free money So like with so many things in life, there are trade-offs good and bad if you retire early you have more freedom however, you're gonna get penalized when your kids apply for financial aid and That's just the way it is trade-offs.

All right Let me leave you with how to really game the college financial aid system According to Michael he has three tips to talk about One get divorced on paper and place the children in the home of the parent with little to no income Uh-huh to have the child get married which would qualify them as independent from parents So family assets and income aren't counted at all three various self-identifying racial sexual gender characteristics So let's talk about this for a little bit the first idea Getting divorced is the most feasible, you know marriage for a lot of people is I don't know there's like a marriage tax penalty for a lot of income earners, right if you earn a particularly high income and you Marry another person with a particularly high income You're gonna in the past used to pay like five ten fifteen thousand a year and extra Taxes now that went away in about 2017 So unless your household income is above about five hundred thousand dollars, you're not gonna pay the marriage penalty tax but this strategy of getting divorce on paper is It's gonna probably work and divorce is not uncommon.

The divorce rate is 40 to 50 percent So let's move on to action point number two Have your children get married so the parents income and assets aren't included Well, that's gonna be hard Are you really gonna get your 18 year old to marry someone because that's the legal minimum age in many states So 18 you get married and then you basically have no income and very little in assets So you're gonna look great on the FAFSA But what you would have to do is probably get married and then I guess wait a year Defer going to college for one year, which is not bad.

It's very common in places like Australia It's called like the walkabout where you go travel and explore the same thing in Europe a lot of Europeans after high school They just explore the world for a year and see the world mature gain better perspectives So that's not bad But come on, are you really gonna force your kid to get married and is your kid really gonna go along with this plan?

Mmm, kind of tough. All right well the final way to really game the financial aid system is to identify as a person who is very much underrepresented whether that's race or Sexuality or whatever it is that college or society deems is in need of help There's just one problem with this strategy It's hard to change who we are and I believe we should all be proud of who we are at the same time we should understand the socio-economic landscape the political landscape and See what is going on in terms of who gets a better chance to get in where who gets more money?

Who gets more assistance and if you happen to identify as one of those people? Well, I think you have a right to identify as one of those people who gets to determine who you are Except for you and there's one love for everybody. All right, everybody I hope you enjoyed this episode if you have experience with the FAFSA College financial aid system.

I'd love to hear it in a comment in the post shoot me an email Leave a review on financial samurai podcast. It's always great to hear different perspectives different strategies Because at the end of the day, we just want to save money We want to make money and we want to secure our future and our children's futures as well to stay in touch Don't forget to subscribe to the financial samurai newsletter at financial samurai comm forward slash news You can get all my posts as soon as they come out via email at financial samurai comm forward slash email Without the - and to support my work, please pick up a copy of buy this not that at financial samurai comm Forward slash buy this not that talk to y'all later