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April 18, 2008


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this is totally off-topic (sorry), but did your labels disappear? I was trying to find an old post and realized that you don't have the labels in the sidebar anymore... or am I missing something?

As for this post...

Well, I've given this some thought previously, since originally my plans included going to professional school after college. I would not put money into any sort of general investment account, because it will be counted against you... and you'll need every bit of money you can get (esp as a medical or dental student). Even this time of work that you are in now will likely affect you when you apply for fin aid.

Can you prepay tuition at this years price? I know some state colleges (I realize you are talking pro school here) allow you to pre-purchase tuition at the current price. If you know where you will be going you may look into pre buying or paying now to lock in a lower price.

I am not sure how feasible this is (or ethical), but would you be able to take the money you saved and convey it to your parents as a gift and then have them reconvey it to you once you start school? I have no idea what the tax implications are, but if you are somehow able to shelter the money with someone else, that might be the way to go. Then again, you might have to report it on another form.

I am not sure if you plan on taking loans out, but if you could get some Stafford subsidized loans, that would be good to max out. Maybe someone else will have some better insights.

At the risk of being called a flamer, I think you are looking at this from the wrong direction. If you are currently employed and able to save money, you should do so. It's my opinion that not saving simply because that will affect your potential financial aid is ethically wrong. I fully expect others to disagree with me.

But you are an adult now with a college degree. You're not talking about undergraduate school; you're plan is to attend a professional school, which should give you the opportunity to earn a very good income for many decades to come. By all means take advantage of any financial aid you still would qualify for, but otherwise I think the right thing to do is save your money now in a money market account, bank CD or US treasuries, and make the best of it when the bills start to come due.

And I say this as a parent who has saved for almost 16 years now for my kids college expenses. I'll apply for financial aid when the time comes, but I never once gave a thought to not saving so that I could then qualify for more aid.

Ben E has the right idea. If you give your parents a "gift" of all of your savings, it is tax free and will no longer be in your name. I would setup savings and investing accounts in your parents name and be investing in those.

As for the 401(k), if you have matching, you should be taking advantage of that, even if it negatively effects your FinAid. If not, I would continue to invest in the accounts previously mentioned. The tax breaks are not there, but it is better than having no savings. Your parents then "gift" you the money back after you graduate or when tuition is due.

That being said, many people will chastise me severely for saying this. They will say it's unethical, and immoral, etc. That's their opinion. A countless number of people do this, I'm not saying it's right or wrong, but you might as well follow suit or you won't get anything.

I agree with rwh. Financial aid is for people who really need it. Qualifying for less financial aid is much better than spending money that you can afford to save on things you don't need. I doubt the difference would be that much anyway. Sheltering the money with your parents is unethical and most likely illegal.

That being said, I would stick with a high yeild savings account if you plan to attend in 2-3 years rather than investments. Keep in mind that you can use Roth IRA money at any time for school with no penalty.

I had another idea for those who think gifting the money to a family member may be illegal or unethical. How about loaning the money to a family member?

Before you do your financial aid calculation, write up a simple document for a personal loan to your parent or another close family member or friend. The friend could then put the money in a high-yield savings account and earn their own interest. Then from that money, they would pay you a payment as specified in the loan documents until the money was paid back. They obviously could repay it early if they chose to do so.

The only problem with this is that they could potentially spend your money and bum out on the loan. Then you'd have the expenses of going into debt collection to get your money back.

By the way, I must say I'm impressed if you will have over $20,000 dollars to put in the retirement accounts and still have discretionary income left.

I would suggest to save as much as you can in high yield savings account. If you are serious about professional graduate education, the vast majority of your financial aid package would come in the form of loans as opposed to grants anyway. So if you save as much as you can, you will not have as much loan debt when you graduate. Loan debt has become a major concern of graduates of law and medical school especially, and it does effect what choices you make regarding your career later. Don't be fooled by what percentages schools list for students on aid, because cut it in half (or two thirds) and that is what actually received grants. Plus the average grant, if you get one, is like 20% of the yearly cost, with the rest coming in loans. So having as much $$ on hand as you can is very important if you are planning to attend professional graduate schools.


I won't completely disagree with you, but consider this. Do you know how much dental school costs these days? There are some schools that cost 300k for 4 years (NYU and USC), with many other d-schools not too far behind. For *most* people, it is not possible to save up and pay for that type of education, thus they use as much fin aid as possible. It is especially unrealistic to save up anything substantial (relative to 300k) in 2 years of work before starting professional school.

Brandon's idea for a "loan" to your parents probably defeats the point because the promissory note itself is an asset that you must disclose.

I can't ethically promote the "gift to your parents" idea, but from a legal standpoint, you can gift up to $12k per year to each of your mother and father (and anyone else) and they can decide to "gift" it back to you later with no tax consequences. Although your parents must report (and pay tax on) any income that is earned on the money while they have it.

I was making a 6 figure income before I went to law school, and during that time I was fully funding my 401(k), and getting a nice match from my employer. I later withdrew money from my 401(k) to pay the balance of my living expenses and tuition that wasn't covered by my Stafford loans. I couldn't qualify for private loans, so I really didn't have much of a choice. I had to pay income tax on my 401(k) withdrawals, but I was in such a low tax bracket at the time that it didn't amount to very much. And there was no penalty to use the funds for education. So I like the idea of using your Roth IRA for school expenses. Avoid private loans like the plague. Most of them have variable rate and they are very hard to consolidate.

Finally, I wouldn't bank too much on getting any financial aid, no matter what your assets are when you apply. They will look at your tax records for the 2-3 years before school, and if you made a nice income, you are not going to qualify for aid as easily as all of the 22 year olds going straight from college to law school without ever having worked a real job. In my entire 3 years, I never received aid (and I went to a school that was very generous with aid). Only after begging and pleading each year did I finally get a $5,000 0% trustee's loan for my 3rd year, which still had to be paid back.

Bottom line = don't rely on anyone/anything to cover your education expenses. Save as much as possible to cover as much of the expenses now as you can. Good luck.

If you gift money to someone and they gift it back, it's not sheltering, nor is it illegal. It's just one of the many loopholes in the way we are taxed and the way your FAFSA is calculated.

J in FL: I'm not unsympathetic to the plight of those who are trying to figure out a way to pay for professional school.

But on the other hand, have you paid a legal or dental bill lately? I just sold my mom's house as part of settling her estate. She lived in a small town where things don't cost much and the house sold for 25k. The abstract cost $450 to update.

I just had my teeth cleaned last week and the bill was $200. My daughter's braces cost almost 3k.

And the thing about lawyers and dentists is they expect to be paid right now, in full.

My guess is even if it cost 300k to attend dental school or 1/2 to 3/4 that to attend law school, within a few years of graduation that will amount to about one year's income, maybe less.

In addition, at least for a dentist or MD, there are many small towns and medically underserved areas that will pay the cost of professional school if the recipient agrees to work x number of years in the sponsoring community.

So my advice remains the same: save all the money you can while you're working. At the very least it establishes good habits.

And I'm glad to see many of the comments do question the ethics of trying to hide assets to improve financial aid.

I'm more on rwh's side of the ethics fence on this one, but pragmatically, I tend to agree with Amy's comment that the person posing the question is not all that likely to get financial aid (or much) in any event (or it will just come in the form of loans, as Laurie mentions). So why undertake these more tortured paths when it may not make any difference?

BTW, in addition to Amy's observations about the annual limitations on gifts and having to disclose the promissory note as an asset, I believe that, if you make a loan, there is a federally required minimum interest rate that you must charge. If you don't charge that interest, the loan recipient (the parents in the given example) are obligated to report the amount of interest as a gift to them. I think that's the case anyway....

So two years away? Something liquid and safe -- savings, CDs, maybe T-bills.

Okay, best advice I can come up with (being 6 yrs out of medical school and "scraping by" on $100k): Financial Aid in medical school is called LOANS. Unless you have a 4.0 undergrad GPA and are an underrepresented minority, you are going to be PAYING for medical (or dental) school. Your FAFSA determines how much you can borrow. If you are able to work for a couple of years and save some money, that's great! Spend it on school. Pay your tuition, books, etc. now and you won't still be paying for it 34 yrs from now. Live as frugally as you possibly can so that you aren't borrowing for living expenses too (I learned this lesson a little too late). Imagine paying interest on that daily latte or that pricy laptop for years to come. Live with parents, relatives, friends, in the dorm, whatever it takes. Brown bag your lunch. Eat dinner at the hospital. Buy classic professional-looking clothing that won't go out of style. In short, don't live the doctor lifestyle, just yet. Opt for subsidized and unsubsidized federal Stafford loans, but only borrow what you truly need, not all that is offered. Don't take private loans. Go to a state school (in your state). You don't have to spend $300,000 on your degree. In the end, graduates of any med school are called "Doctor." Price tag for my MD: $86,000. That's $78,000 in Stafford Loans, both subsidized and unsubsidized, now consolidated for 30 years at 2.25%, $5000 in Perkins Loans at 5%, and a measly $3000 scholarship (my merit-based "financial aid"). That may not sound too bad to most people, but I do have friends that borrowed less by living frugally, and I bet they don't wince at their monthly loan payments the way that I do.


Good points!

(finally, somebody who has been there weighs in :))

I'm going to echo JDM. I'm in my second year of law school right now. I took a year off and saved up -- I maxed out my 401k with employer matching -- and ended up with a goodly amount in my savings account.

But how did that impact financial aid?

They didn't expect me to use my 401k (even with the employer matching) and didn't use it at all in my financial aid calculations. This may vary from school to school, but I suspect it's more the rule than the exception.

The rest of my savings didn't affect my grant more than a little. They affected my loans to a much greater extent. I was able to take out $10,000 less in loans that first year because I'd saved up. Same with summer jobs, and with marrying someone holding a job. They've affected my grants a little, but dropped my loans a lot more.

So, yeah -- basically, what JDM said.

Also, in response to rwh, that's all well and good -- but a lot of people coming out of law school these days aren't getting the jobs that pay that much. Some are fortune, and land jobs that pay $160K a year starting out; others eke by as solo practitioners or even paralegals, and make a small fraction of that -- and end up paying their loans off over the next 30 years of their working lives. So, I sympathize with you on the fact that we pay a lot for professional services; but not everyone who gets a professional degree is rolling in the dough, either.

I'm actually in this exact situation, and I was hoping for some more information. While I have a fair amount of discretionary income now, it's unlikely to add up to more than 10k before I enter law school in two years (I'm earning very little in an area of the country with an extremely low cost of living).

How do the top 25 or so law schools typically calculate financial aid? Will my $10,000 in a high interest savings account be $10,000 less in loans/grants I receive? It seems from Pikovaya's comments that it will mostly be less in loans, but does anyone know more details about how that is typically calculated?

For that matter, are law school loans interest deferred? In that case, even if this savings only effects my loans, wouldn't it be in my financial best interest to gift the money to my parents, get the maximum amount of loans, have the $10,000 earning interest for three years, and then immediately pay back those $10,000 in interest deferred loans as soon as they would start accruing interest? Even at a conservative 4% a year, that could be $1200 in lost interest if I am forced to pay an additional $10,000 my first year because of my frugal spending now.

This matters to me, not just because $1200 is a lot of money at my stage of life, but because if my savings now will affect my law school grants, then, well, I want to be spending my money now!

My email is deluvians at gmail dot com if anyone cares to email me directly--I really could use help. I am trying to be as financially prudent as possible at this stage in my life (and still trying to figure out exactly how all of these things work) and it would be incredibly frustrating if my tightened pockets now just means that I have to pay more for law school later.


J --

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