THE BAIT: "THIS POLICY WILL LOWER YOUR COLLEGE COSTS"
"Without the proper guidance, practically all of the student's and parents' assets are there for the taking and are eventually absorbed by the college," warns Starvingmarket.com, the website run by College Funding Solutions to recruit planners.
College funding specialist Ron English of Greenville, S.C., last year's top-selling general agent for MTL, an insurer that is targeting the college market, says he advises wealthy parents to move assets into life insurance because "bringing your EFC down from $200,000 to $100,000 [over four years] ... increases merit awards."
There is one problem with these kinds of pitches: The claims often have big holes in them.
Take merit aid. These awards are usually determined by the admissions office, not the financial aid office, based on a student's grades, scores, or talents, says Peter Van Buskirk, former head of admissions and financial aid at Franklin & Marshall College, and author of The Admissions Game.
In the rare cases when household finances are taken into account, students from families with substantial savings have a good chance of getting larger scholarships, says Glendi Gaddis, director of financial aid at Trinity University in San Antonio. Although Trinity doesn't use this strategy, she explains, "a college might hope to entice a student from a family with significant resources, hoping that family might later donate to the school."
For need-based assistance, it's true that 99% of colleges exclude life insurance from consideration. Shifting assets into insurance to shield them from being "taken" by a college, however, usually doesn't help much, because parent savings aren't counted heavily in federal aid calculations.
At most, your contribution could rise by 5.64% of your nonretirement assets, after an exclusion of at least $30,000 a couple, says Mark Kantrowitz, publisher of FinAid.org.
Income, though, is dunned heavily: up to 47% of parental earnings, after a typical exclusion of about $50,000 for a family of four earning $100,000.
Generally, says Kantrowitz, if you have large enough assets to make a big difference in your expected contribution, your income is too big to get a need-based grant. "These insurance strategies usually backfire on the family," he says. "But by the time parents realize that, the adviser who told them to invest in life insurance has already gotten his money."
There are a few types of families that might benefit: those with moderate incomes but sizable nonretirement assets from, say, an inheritance or a second home or whose college-age children have significant savings of their own.
Colleges reduce need-based aid by at least 20% of student assets (excluding anything in 529 plans). You might also gain an advantage if your child applies to any of the 200 or so private schools that ask parents to fill out a second financial form called the CSS/ Profile.
The form asks about items that are excluded from the federal equation, such as homes, small businesses, and retirement accounts. That creates a larger pool of assets the school may count in figuring your contribution. The form, however, usually does not explicitly ask about life insurance.
Even under these circumstances, though, repositioning assets is no guarantee of increased aid.
For one thing, since most colleges are short on grant dollars, they first try to fill a freshman's need with government aid, including student loans, says Kalman Chany, author of Paying for College Without Going Broke.
Moreover, each school that uses the CSS/Profile has its own secret-sauce formula for how it will use the information, so, at best, you can get only a rough projection of what, if any, impact asset-shifting will have. All you can know for sure is that at the handful of schools that specifically ask about life insurance -- including Amherst and Boston College -- you can't move the needle.
Worse still, shifting assets could harm your child's chances for admission at some schools. About 20% of private colleges give preference to some students who can pay full price, NACAC has found.
Shifting assets certainly backfired for Catherine Bryant, a swim instructor, and her husband, Luis Aguilar, a municipal equipment operator. In 2009, the Ventura, Calif., couple hired local college funding adviser Linda Taylor, who suggested they raise $100,000 to pay tuition at the University of California at Berkeley for their son Nico with a cash-out refinancing of their home.
If they parked the money in an annuity, Taylor said, they'd earn a guaranteed return and wouldn't have to report the increase in their savings on their federal aid application. The couple took Taylor's advice, but the maneuvering didn't work; Nico didn't get a grant.
It isn't unusual for repositioning to fail to achieve the desired results, but Bryant's story took a particularly sordid turn. When she and Aguilar tried to tap the annuity to pay college bills in 2010, they discovered the investment was fraudulent -- and they'd lost all their money.
Nico had to accelerate his studies to finish college in three years and put off law school; his parents are still paying off the home loan.
As for Taylor, she pleaded guilty last year to wire fraud and is serving a 54-month sentence at a medium-security facility in Victorville, Calif.
How to avoid the trap
Play "before and after." To see if shifting assets might help you, fill out the College Board's EFC calculator and net price calculators posted by the schools your child is targeting, suggests Chany.
First, fill them out correctly; then redo the forms, reducing your nonretirement assets by the amount you might move into insurance. If moving assets won't bring your expected contribution down to at least $7,000 below the cost of attendance, says Chany, don't bother.
Get those grades up. Improving your child's test scores, grades, or special skills could do more to increase grants from private colleges than moving assets, says Chany. Research shows two-thirds of private colleges award bigger need-based grants to students with great academics. A growing number of colleges are including merit scholarship information in their web calculators.
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