No. of Recommendations: 3
I'm going to take the contrary view to just about everybody else on this thread.

Financial aid is a system, like many other systems. There are rules to follow. Some of the rules make sense, while others don't. But there is nothing unethical about looking through the rules to see if there are things you can do to get a better situation. With a fixed lump sum of money that may have to last a lifetime, it's critical that a grieving family do everything it can to get a firm grip on their finances as quickly as possible.

Is it unethical to set up a bypass trust for your spouse? By doing so, you potentially reduce or eliminate estate taxes. Is it unethical to buy equipment for your business simply because there are provisions that allow you to deduct the cost immediately? Of course not. Most of the posts seem to think that there's no way this person could get financial aid without doing so under false pretenses, and that's just ridiculous.

The July 2005 issue of the Journal of Financial Planning has an excellent article on the huge variety of college planning considerations. The article states that all other things being equal:

- Increasing parental income reduces awards;

- Increasing parental net worth reduces awards, but not as quickly as income;

- Increasing student wealth reduces awards more quickly than increasing parental wealth; and

- Increasing home equity has no effect on the federal aid formula, although individual colleges might take it into account.

http://www.fpanet.org/journal/articles/2005_Issues/jfp0705-art6.cfm

In addition, there are some other complicated rules that don't make a lot of apparent sense. The two types of 529 plans are treated differently: 529 prepaid tuition plans are not considered an asset, but 529 savings plans are. I have heard life insurance agents say that money held within life insurance policies is not considered as an asset; they then try to sell universal variable life policies as a way of obtaining investment returns packaged inside an exempt life insurance asset. Similarly, retirement funds may get preferential treatment.

There's a website designed to help you maximize awards:

http://www.finaid.org/fafsa/maximize.phtml

This site makes it clear that there's a distinction between hiding assets and sheltering assets. The rules let you shelter assets. In my opinion, there's nothing wrong with using the rules to your best advantage.

You can also check this site:

http://ifap.ed.gov

although it's geared more toward financial professionals and seemed a lot more difficult to navigate than the finaid.org site.

Finally, keep this in mind: $750,000 may sound like a lot of money, but we don't know the purposes for which the insurance was bought. If the sole purpose was to pay for college for the kids, then it should be plenty. But if it was meant to support the surviving spouse for life, it's important that as much of those funds as possible be preserved not only for kids' college but for the surviving spouse's own living expenses.

dan
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