As often is the case at most state universities, if the parents' income is too high to qualify for need-based financial aid anyway, then moving the assets into parents names, and moving into life insurance and annuities, won’t help the child qualify for aid.
For example, if the expected family contribution (EFC) is $25,000 per year and the child has $20,000 in her savings account, then 20% of the child’s $20,000 is adding $4,000 to the family’s $25,000 EFC. So if the family puts the child’s assets into an annuity so that they won’t be reported for aid purposes, the family’s EFC will drop from $25,000 to $21,000 per year. However, if the child stays in-state and attends a state university that costs $19,000 per year, the cost will be less than the family’s EFC and the child still will not qualify for need-based aid.
Conversely, if the cost of the college is say, $30,000 per year and the family’s EFC is $25,000, then the student will qualify for $5,000 in aid to begin with, and by moving her assets into an annuity she will qualify for $9,000 in aid at colleges using the federal methodology because her EFC will drop by $4,000 per year because the $20,000 in assets are not being counted at 20%.
However, if the family needs her money to pay for college, then it will show up the next year as a distribution from the annuity and the scheme backfires. Moreover, you may have to pay penalties to get out of the annuity. Furthermore, even if the student does qualify for $4,000 more in need-based aid by stashing the assets, the college may merely “fill” that additional $4,000 of financial need with a Stafford loan that has to be repaid, or worse, may not fill that need at all; there’s no guarantee on what you will get at most colleges. So what have you achieved in the end?
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There’s a time and a place for most things, but stashing the money from your child’s savings account, or your own, into an annuity is often not advisable, especially when: 1) There are limited other sources of funds to pay the family’s share of college costs, 2) there are other ways to soundly reduce the impact on aid eligibility, 3) it doesn’t work at colleges that require the CSS Profile form in addition to the FAFSA, and 4) not knowing what form of aid, if any, the student will receive just because the child may technically qualify for it.
