<p>I hope that in the end this isn't just an academic question, and that something can be done to correct what I think is hurting a lot of us in our financial aid applications.<br>
FAFSA has a line that requires you to add your 401k contributions back into your adjusted gross income. Since this can easily kick you up much higher in EFC (ours added about 60% of our 401k contributions as additional EFC) it effectively makes you choose between 401k and financial aid (not asking for sympathy there, just noting it).
I've done some research into that particular addition, looking for the authority for including it. All I can find is the language in the underlying statute, but that restricts the addition to IRA and pension contributions. It isn't broad enough to include other retirement vehicles like 401k.<br>
Does anyone know where the Dept. of Education found the authority to require this inclusion? And/or where within the Dept. I can ask that question? (I'm hoping that the answer will come before both of my kids graduate.)</p>
<p>I have no idea about the legal legitimacy of the requirement, which is the point of your question. But from the standpoint of sound public policy, I think the Department of Education is on solid ground. Making a 401K contribution is making the same basic choice as making a pension or IRA contribution - you are choosing to use available funds for something other than your children’s education. </p>
<p>And the rest of the taxpayers are already subsidizing that choice by giving you a tax break. Why should we further subsidize it by replacing some of those discretionary funds you’ve chosen to utilize otherwise through federal financial aid?</p>
<p>I don’t have an answer to your question, but does it really matter? In the end, if someone tells them they cannot do this, it will not result in the amount of public or institutional financial aid funds being increased. The only changes that will result will likely be changes in the formulas used to calculate EFC, and many FAFSA only schools switching to the CSS profile so they can ask this question. </p>
<p>You may not like the fact that some of this money was added back, but it seems reasonable that they are attempting create a level playing field for all who apply.</p>
<p>Are you asking so you can appeal the FAFSA process/calculations? I doubt you’ll win.</p>
<p>It is putting you on the same footing as a person who does not have a 401K It is not taking into consideration all the money you did contribute in past years. </p>
<p>Some of us do hold off on such contributions while kids are in college. Financial planners say it isn’t wise but if that is the only money available to make it go, it might be wise to do so… To make that decision in an informed way, analyze what you lose in doing it either way, or by borrowing from other sources via stopping the contributions.With an employer match, it was wiser for us to borrow and continue to contribute. When you do that, you get the tax deduction, shelter for any gains, and can maybe deduct interest on the loan. You just don’t get to shelter that year’s contribution when it comes to financial aid analysis.</p>
<p>What it does not do is put you on the same footing as the person who has a mandatory pension contribution taken from his/her wages. That person gets to continue to contribute to retirement without having it count towards the EFC. So, still unfair, particularly since those relying on a 401K for retirement tend to be woefully behind where they need to be, and those with pensions – particularly public pensions with cost of living inflators – don’t have that as an issue.</p>
<p>Didn’t say it was fair. The person self funding his pension by investing in rentals doesn’t get a break either. The person who is lucky enough to work for a company who provides a pensions doesn’t have to provide that benefit.</p>
<p>So are you folks saying that an IRA contribution isn’t “counted against you” but a 401K contribution is?</p>
<p>IRA contributions for that FAFSA year have to be added back to income just as 401k contributions are.</p>
<p>OK, thank you for the clarification!</p>
<p>
No, no one is saying that. Non Roth IRAs and 401ks are treated the same by FAFSA. The exception is certain jobs where people are obligated to make mandatory contributions.</p>
<p>Neither 401k nor IRA contributions are “counted against you” for FAFSA - you just cannot reduce the amount of income FAFSA uses to calculate your EFC by making a contribution to one of these accounts in years your child is attending college. Most deductions for tax purposes are below the line deductions (i.e. after AGI) so do not affect your EFC. Contributions to non Roth IRAs and 401ks are above the line deductions (before AGI) so would affect the EFC, but under the rules, which are set by congress, they must be added back to income as untaxed in the EFC formula.</p>
<p>There have been other deductions that have to be added back, such as the Making Work Pay credit and the first-time home buyer credit.</p>
<p>To answer the question, Congress makes the rules - they are the SUPREME rule makers for financial aid. The Department of Education interprets the regulations very strictly, and they provide training for financial aid professionals.</p>
<p>FAFSA is a federal form and the feds get to decide what is included in order to determine financial need. There’s no argument to make.</p>
<p>The thinking is that a family can choose to fund 401ks and IRAs during the college years, or not. The thinking is that it’s a choice.</p>
<p>For CSS schools, some will even look at the entire worth of the 401k, etc. They don’t need a law for them to do so. If you’re asking for THEIR money, they can consider whatever they want. Just like if you went to a relative to ask for money, they might say, “hey, you have money in your 401k…get it from there first.”</p>
<p>If you want/need to continue to contributing to your 401k during the college years, but it’s increasing your EFC, then “do the math” and determine which is better for YOU…is it better that YOU borrow your EFC thru Parent Plus or it is better for you to not to contribute to retirement accts during those years.</p>
<p>There are a number of loopholes and inconsistencies in the way need is calculated. Some big thing as well as little nooks and there are those who benefit and those who get hit hard. The fact that it is a “snapshot” makes it tough for anyone who has just moved into an income bracket after years of low pay, or for those getting some windfall. In the latter case, the best thing to often do, is to hold off a year if it is truly a one time thing and should be put to other uses than college costs, and it makes a big difference. Just doing the FAFSA on a “bad day” when you happen to have a lot of assets sitting there can hurt you, and you can’t just refile. So there are some quirks in the system.</p>
<p>The FAFSA rules embody policy that are in many ways contradictory. However they are designed to be simplistic. As per government policy, people are encouraged to save for retirement through IRA’s and 401k type plans (social security is not supposed to be the only retirement source). At the same time parents are told that they need to be responsible for their child’s education. Some times these objectives conflict (One may not be able to save for retirement and pay for the child education at the same time), but the department of education is not responsible for resolving this conflict. They interpret the rules as per law enacted by the legislative branch, as pointed out by Kelsmom.</p>
<p>If OP feels that the interpretation of DOE is wrong, then a legal forum is the best alternative as most posters in this forum have no legal training i.e. OP may need to talk a lawyer or post this question in a forum where lawyers abound.</p>
<p>If OP feels this is a stupid and insane requirement, he/she needs to talk to a congressperson/ senator, which may be the equivalent of titling windmills.</p>