<p>When the financial aid is considered, do they (colleges and FAFSA administrators) take the adjusted gross income after the 401-K deferrals or do they consider the unadjusted gross before 401-K deferrals. </p>
<p>I and my husband have not been making 401-K deferrals so far because only one of us was working at any time, and we needed to free up as much as our paycheck for expenses and making small savings for emergencies - we have tried to maintain 5 months of expenses in case we both were to be jobless. Although we pay into social security, medicare and unemployment benefits, we are not entitled to any of them since we do not have a Green Card yet. </p>
<p>At this point both of us are working, and we can save what we can in 401-K or keep it liquid for college expenses. If colleges take our paying capacity before deducting the 401-K, we are better off holding off on 401-K deferrals, in order to have cash for college. Otherwise, we could begin our 401-K savings.</p>
<p>Since we need to make deferral decisions at this point in our respective work places, I need your advise.</p>
<p>We will not be filling FAFSA this year, but if by God's grace and good thoughts we do get our GC next year, we will be able to start filling out FAFSA next year. But we will be filling out College Aid forms this year to those colleges that provide aid for internationals from the college funds. Though not need-blind in admissions, some of the colleges provide need-based aid on a merit basis depending on the student's standing in the International pool of admits.</p>
<p>It is a mixed bag. The bad: the amount you contribute in the year to your 401(k) plan will be counted in the formula that determines Estimated Family Contribution under FAFSA. (To determine your total assets available for paying college costs, the formula starts with Adjusted Gross Income but then adds back in untaxed income such as amounts put into 401(k) plans). The good: the amount you already have in the account (from prior years contributions and growth) will not be considered in the formula.</p>
<p>Thanks, Drubsa. My question is, say, we make 70K, and defer 10K in 401K. Will they count our income as 70K or 60K in the EFC calculations ? Thanks.</p>
<p>As there can be things taken off gross to get adjusted gross besides retirement contributions, it is not quite that simple. The formula to determine total assets available starts with Adjusted Gross Income but then adds back the retirement contribution as untaxed income, so $70K is what it would be without any other amounts taken off of gross to get adjusted.</p>
<p>The financial aid officer at D's college referred to our 401K contribution as "discretionary income" that we could use to pay for her college. Her argument was that in very real terms, we had a choice as to where we put that money and they would rather see it going towards paying for her college. They factored it in when calculating her aid package. The good news, as Drusba points out, is that they don't take into acount the money that is ALREADY in the 401K account when making their calculations.</p>
<p>Essentially, the federal EFC treats contributions to 401(k)'s, IRA's, and other deferred compensation programs (designed for senior execs at corporations), as Deferred Income. All are added back to the AGI for the purposes of calculating EFC. As Shree points out, it is parental choice to put the funds in a tax-deferred account, or take it as taxable income and use the funds to pay for college expenses.</p>