My son is a high school sophomore, meaning that with the new FAFSA rules that now count the prior TWO years rather than just ONE, my family’s clock started ticking in January of this year. First, am I correct in this – that is, does my son’s family financial profile begin in January 2017 and go until his senior year – or whenever he is accepted by the school and a financial aid package is set? Second part of my question – we have a 529 that was started when he was born. Its value is around $22K and I’ve been told this will actually hurt him in terms of getting $ aid. I am thinking about liquidating it asap and using it for test prep and private college counseling costs. What is the thinking on that kind of move? Will colleges be able to “see” that I did this when my son files his FAFSA senior year?
Your child’s 529 will be assessed for FAFSA EFC purposes at 5.6% of its value. Do NOT liquidate it. Use it for college expenses when the time comes.
In terms of income tax year…and the financial aid forms…
For 2019-2020 the 2017 tax year will be used.
For 2020-2021 the 2018 tax year will be used.
For 2021-2022 the 2019 tax year will be used.
For 2022-2023 the 2020 tax year will be used.
So we’ll assume that your son will be a college freshman in academic year 2019-2020. That will mean that the financial aid forms that will be submitted for his freshman year will consider income and taxes based on calendar year 2017, and reportable assets that you have as of the day that the forms are completed.
I don’t get this at all. First of all, if you do this you will pay income tax plus a 10% penalty on the earnings part of whatever you liquidate and spend on non-qualified expenses, which test prep and college counseling costs would be. Would you pay for these things anyway if you didn’t use 529 money for them? If the answer is yes, then I don’t see any reason to use 529 money to pay the costs. If the answer is no, then the only reason to use 529 money is if your son absolutely needs test prep and college counseling and you absolutely have no other way to pay.
Possibly. If there are any earnings as part of the 529 balance, liquidating and using the account for non-qualified expenses will be a taxable event. Any schools that your son asks for need-based aid from that require tax documents will be able to see that you took a non-qualified 529 distribution.
Your answer is spot with what I’m trying to find out and I appreciate you responding so fast. So our 2017 tax year is what will be used to determine what kind of aid he will get for his freshman year of college. And so on. Husband and I are trying to keep our income down for this and next tax year to enhance son’s need profile. Is there a magic number that colleges use for income? HHI of $70K? Do they take into account the market you live in? And when using an online “Net Price Calculator”, is it simply the one that’s on the College Board site or are there competing Net Price Calculators? How accurate is the NPC?
Related question…
If I have a 9th grader and a 7th grader and grandparents just started a 529s for them this year, is this smart? Will it hurt us for FA when the 9th grader starts college in 3yrs?
How does this compare to my HS sophomore, which they put some $ in an acct via “Uniform Gift To Minors” due to the shorter horizon?
And the reportable assets that custodian parent(s) and the student have as of the date that the financial aid form is completed. Don’t forget the reportable assets.
Why?? This makes no sense. Let’s say that your income is assessed for financial aid purposes at 20%. Would you turn down a $1,000 bonus or raise in an effort to “enhance” your son’s need profile? You need to realize that in doing this you would be giving up $800 (before taxes) in order to avoid a $200 increase in the family’s expected contribution to school costs. You always want to make as much money as you can, regardless of the financial aid situation.
The easy, and best, answer is that it depends on the particular school and other financial criteria.
Generally, no. The only place I know where this happens is that FAFSA uses a rough figuring of state income and (I think) sales taxes.
Each school is required to have a NPC on the school’s web site. Every NPC except this one is “competing.”
Since they can differ between the thousands of colleges, it depends. Some are very good, and some are not so good. It also depends on the quality of the data put in, and how out-of-the-normal your family’s situation is.
Are the grandparent 529 accounts in the grandparent name?
Ther is no magic number when it comes to need based aid. It all depends on the college and the college policies on awarding need based aid. Fact is…MOST (read that again MOST) colleges do NOT guarantee to meet full need for all accepted students. So…if you have a low income for 2017…all that will really mean is…you have a low income for 2017 and less available funds for anything now and in the future.
The colleges that meet full financial need are amongst the most competitive for admissions. The first hurdle your kid will have to scale will be admission…and some of these colleges admit less than 10% of applicants. That means 90% do NOT get admitted.
If you want a guaranteed full federally funded Pell Grant, your income would need to be under $30,000 a year AND you would need to be eligible for SNAP or free reduced lunch, or be able to file a 1040A or 1040 EZ tax form.
Is it REALLY worth it to give up your income earning potential to get a $5800 Pell Grant? Sorry…I don’t think it is.
Now to your question…your kids are a couple of years away from college. The net price calculators on the college websites are set up NOW for students entering in fall 2017. But go ahead and run a couple of them…for a variety of colleges. Make sure to include your instate public universities as well. See what you get running different income scenerios.
Then decide…do you really want to make yourselves low income in an effort to get need based aid…when you don’t even KNOW if your kids will be competitive applicants for the schools with generous and guaranteed need based aid for all accepted students?
Who is the owner of the 529 accounts? A grandparent? A parent? The student/beneficiary?
UGMA funds owned by the student will always be hit harder as an asset than will 529 funds that are owned by the student or a student’s custodian parent. Also, earnings on UGMA funds will very likely be subject to income tax when the asset is sold, and possibly at the parent’s higher tax rate if subject to the kiddie tax. 529 account earnings used for qualified education expenses are not subject to income tax.
Well, we were aiming for a lower income for 2017 and 18 bc when I use the NPCs for different schools, I get a better FA result by keying in a lower income. Most of our savings are in retirement and insurance accounts that do not get counted on the FAFSA. I am not in the job market like I used to be and we were trying to use this to our advantage but I’m getting the sense here that that’s not a good strategy?
My opinion is…it’s always better to earn money…and help pay for your kids to go to college than it is to expect others to pay for your kid to go to college.
But that’s my opinion…and my work ethic. My husband and I both worked full time so we could put our kids through college.
What college NPCs are you running? Remember…your kids need to get ACCEPTED to those colleges to get financial aid from them.
@ctparent2019 you have to reapply for aid EVERY YEAR. It’s not based on the first year. For your “strategy” to have a chance of working, you’d have to keep a lower income for the entire time you have to file for FA. If your youngest is in 7th grade, that is several years- not 2.
And all of these gymnastics are likely not going to earn you any extra financial aid at most schools. With a 70k income, you’re going to get a tiny Pell grant if any at all. That is all the aid that is guaranteed by the federal government (then there are sub & unsub loans).
Would you pay for these things anyway if you didn’t use 529 money for them?
Yes, we would pay for these things anyway. In terms of why we’d liquidate the 529, it would be to increase son’s financial need.
Aiming for a lower income is never a good strategy. Parents are expected to be the primary payers of higher education costs, to the best of their ability. Keeping your income purposely lower in order to shift college costs to someone else is seriously questionable.
5.6% of the 529…that is the % assessed for fafsa purposes…it’s NOT the whole thing.
You are being penny wise and pound foolish.
Where do you think your kid will get accepted to college? Are you SURE he will get accepted to a college that guarantees to meet full need for all? Are you sure?
I’ll give you my opinion…in the 90% of applicants that are denied to these schools are some mighty well qualified applicants…so don’t count your chickens before they hatch.
I honestly wish we had saved MORE before our kids went to college…not less. And it certainly is easier to pay out of current earnings if you have a decent paying job.
-2017 tax year is the year you will use on Fafsa and CSS for his freshman year, assuming he starts college in fall 2019. For his sophomore year, you’ll use 2018 tax year; junior year, 2019 tax year; senior year, 2020 tax year. So if you are trying to “keep your income down” you’ll have to do it for four consecutive years.
-There’s no “magic” income threshold. In addition to income, the other determining factors are assets, family size, number of children in college, and other sources of college funds outside the family. For some colleges, number of years from retirement age of parents is considered. Special circumstances like outsized medical expenses or other emergency expenses may be considered at some schools.
-Fafsa is the form used for federal aid. The only federal aid available is 1) a $5k-$6k (it changes) Pell grant for low income families, 2) subsidized or unsubsidized loans to the student. Maximum loan amount for freshman year is $5.5k. It goes up a little each year. 3) SEOG for low income students. 4) State aid if the student is going to a state school. The only kind of college a student can pay for 100% with funds derived Fafsa alone is a community college or possibly in some cases an in-state public.
-If your son will be applying to certain highly competitive colleges, those colleges have “institutional” aid to give. This would be in addition to the federal aid.
-Merit money is available from some colleges where the student’s scores are in the top quartile for that school. You have to research.
-There’s no geographic allowance.
-You have to use the NPC FOR EACH COLLEGE your student is interested in. They each do it differently.
-Do not liquidate the 529. It will only increase your EFC by 5.6% per year of the amount in the account. For you, that will be about $1,200.
Liquidating a 529 could possibly decrease the need-based financial aid money that your son would receive. What would you do with the liquidated funds? Who owns your sophomore son’s 529 account? As previously mentioned, you will also face tax implications that are easily avoided by simply using the 529 account for its intended purpose.
Oh…and remember…the most generous colleges use the CSS Profile as well as the fafsa to determine your eligibility for institutional need based aid. It looks into much more detail than the fafsa. For example, home equity in your primary residence is considered to some degree at a lot of places.
As @brantly noted…your income will need to be VERY low to qualify for federally funded need biased aid for YEARS…especially since you have two younger kids. Do,you really plan to love at or below the overtly level starting now…and continuing for years?
Also, money paid by grandma and grandpa will need to be reported in subsequent years…there IS a question about money paid on your behalf…and if they help with college costs…it WILL be included.
@sunnyschool If the 529 accounts are in the grandparents’ names, it is not a good idea. Then when the funds are disbursed, it will be income that will have to be reported on the following year’s Fafsa. The 529 should be in your name or the child’s name. Grandparents can still contribute to it. I understand that they want the tax benefit, but to be of maximum benefit to the student it shouldn’t be in grandparents’ names. One exception: If the student isn’t going to use those funds until senior year.
^^^
With the change to prior-prior year income reporting, gifts to students or distributions from grandparent owned 529 accounts can be made as early as spring semester of sophomore year and have no impact on future need-based financial aid, assuming the student will graduate in the traditional four years.
^^^^Good point @BelknapPoint !! Duh. I should have thought of that. Thank you.
The point is, always think about the effect on future income.