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Public Alert from the National Institute of Certified College Planners (NICCP.com)
There are certain organizations and individuals that use the promise of scholarships and/or financial aid for students to sell financial services and products to unsuspecting families. These financial services and products may be inappropriate for families.
The National Institute of Certified College Planners (niccp.com) warns families to perform due diligence when dealing with the following two types of organizations or individuals:
1) “Scholarship Search Organizations”
Their Pitch: They promise a family that they can get scholarships for their student in exchange for a fee.
The Problem: In most cases, the family can apply for the same scholarships from the local high school guidance counselor or from free websites such as Finaid.org or Fastweb.com.
(Note: There are legitimate scholarship search organizations that provide a valuable scholarship service for a fee.)
2) “Life Insurance Commission Driven Organizations or Individuals”
Their Pitch: They promote the strategy of pulling out a family’s home equity and putting the home loan proceeds into a life insurance policy to hide the home equity asset from the college financial aid formulas. The family would then withdraw from the life insurance policy to pay for college.
The Problem: The problem with this strategy is that most colleges don’t count home equity in their financial aid formulas. Also, some of the colleges that do count home equity will cap the amount that they count. In addition, the withdrawal from the life insurance policy, except for loans, will be assessed in the financial aid eligibility formulas at up to a 47% assessment rate regardless of the fact that all or part of the withdrawal may be tax-free. Therefore, there may be little or no benefit of this strategy, while costing the family thousands of dollars in insurance commissions.
(Note: Depending on a family’s financial circumstances and goals, a life insurance product may be appropriate for the family)
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