Our D got into several excellent schools and we had done our research beforehand, making sure we could afford them before she submitted applications. We were surprised that all the schools she was admitted to gave little to nothing in financial aid, whereas the NPCs gave us a different impression. Here’s what we learned in conversation with the Finaid offices.
If you save money in a sponsored retirement plan, such as the USG Thrift Savings Plan (TSP) or Traditional IRA, then all the pre-tax income that you save is placed right back into your income to be calculated as part of your total for the purposes of financial aid. While the CSS and FAFSA don’t calculate the money you actually have in the account, they both consider as untaxed income the total amount that you actually save in the tax year! So, for us in our mid-50s, we are penalized when saving for retirement.
We live overseas and work for a small US government agency in what is called a ‘hardship post’. Our housing is provided by the USG, but we have no choice in it and it must meet security and health standards and it isn’t cheap. It is calculated by FAFSA and CSS as an untaxed income benefit (dollar for dollar) and the total amount again was added onto our income. Only in the past few days have I learned that the US military overseas have the same problem, that if they live off-base, their housing is untaxed income. If they on-base, it is not.
I’m not complaining or whining, just surprised I didn’t know about all this before. Our D got into an excellent school and got enough merit aid to make it affordable, but not easy.
Raising this topic to see what others have found and learned in these areas?
We have the very same situation, work for the US government overseas. NPCs don’t work well for our situation at all. Actually, I was glad that I ran an NPC when my daughter was a freshman in high school at one of the expensive meets 100% of need and learned that we were not going to qualify for any need based aid, and that took me in the direction of learning about looking for merit.
My eyes are wide open now. The great thing is our D has done all the hard work to get in and get merit aid, can graduate little to no debt, and excel at a wonderful school. So very proud of her.
These aren’t surprising but you could ask for professional judgment to alter the amount included as untaxed income for housing down to what would be paid “stateside”.
Current year voluntary retirement savings is added back to income. Receiving paid housing frees up other income to go toward paying for college.
Yes, once I ran one NPC at an elite meets 100 percent of need school I knew we had to look for a different way to seek a discount. The merit scholarship worked out fine.
As far as adding retirement contributions back into available income - doesn’t that vary by school? The same thing applies to home equity - some schools may expect you to tap into a portion of your home equity in order to help pay for college expenses.
In any event, @934homer , congrats to your daughter for working hard and getting into schools with enough merit so that between that and what you can afford to pay, she will graduate with little to no debt.
We have post-tax retirement accounts so am not sure what role they are playing in our income. We have found a lot of things with two kids in college that we didn’t know of when we had our older one or the second one in college. Now that our third is starting college and we face $60k per year, we need to really figure out what’s happening.
OP, thanks for sharing. We found the exact same thing: NPC said a discount of $22,000 at a top-20 private, actual results were $0.
I think it’s not only the current-period contributions to a tax-deferred retirement account, but also the current value of those assets as reported in the CSS PROFILE. The question is how much of those tax-deferred assets are being considered? It’s anyone’s guess. We know that 5% of parental taxable financial assets are included in the FAFSA EFC, but individual schools probably have their own algorithms for how to address tax-deferred assets. It probably has something to do with how old you are, and how much you have.
I suppose this makes sense at some level because it is a parental asset, but the tax/penalty hit of plundering one’s retirement account is extraordinary. It’s really hard to understand why colleges would factor this in as a usable asset.
I don’t think so - this is one of the FAFSA questions, and Profile also asks it. If there is a school out there that doesn’t add contributions to qualified retirement plans back to income, I haven’t heard of it.
If these accounts are throwing off dividends or capital gains distributions, that will add to your income that is considered for financial aid purposes, and the account balances (as of the day of completing FA forms) will be considered as assets available to pay for college expenses.
True, these account balances are reported on Profile, but unless the balance is way more than is needed to fund a comfortable retirement (based on the account owner’s current age), it’s very likely that this information is being used only to provide added context to the family’s overall financial situation. In other words, it’s highly unlikely that a school will expect you to raid your qualified retirement accounts to help pay for junior’s college costs.
Are these Roth IRAs or some type of other Roth? If yes, first, you would NOT report that as part of your tax deferred contribution that gets added back since you did not get a deduction for making this contribution. You may have to include it as part of your general retirement funds when you report what you have in all of your retirement funds (401k or IRA) together (not sure). Any income or profits in this Roth account that stay within this account are NOT income and grow tax free (subject to certain rules on what happens when you go to take this money out at retirement or earlier).
For those who said that they are penalized on FAFSA for doing tax deferred 401ks or IRAs it is not really true. You deduct your tax deferred contribution from your annual income and they are asking you to add that deduction back in. It is a wash since if you did not make that IRA contribution you would have been taxed on that money and it would have been included in your FAFSA income.
This way you are getting the tax benefit (since the federal government does not want you on medicaid when you are old, public policy) but FAFSA confirms that this is a voluntary contribution (and schools do not care what happens when you are 80 or 90) so schools are not willing to subsidize it. Especially since you still have the money you contributed, it is in a retirement account instead of in your bank account.
Good point about Roth IRAs, which are of course “post-tax” retirement accounts, but also are qualified retirement accounts. I should have qualified my answer in post #10 as addressing non-qualified retirement accounts.
Lots of good insights and experience here. It seems like the most disadvantageous accounts are pre-tax voluntary contributions, which SeekingPam rightly notes that schools aren’t willing to subsidize. And yet, post tax accounts, such as the Roth, are limited at $6,500 per year. Those of us ‘catching up’ have some things to think about. As others have noted, focus on the merit schools!
The FAFSA adds back pretax contributions as income as part of the calculation…for everyone…doesn’t matter what college they attend.
Get a paper copy of the FAFSA and you will see that this is there.
Now…what MIGHT…and I say MIGHT because there really isn’t any proof about this. Some profile schools do ask for the actual balances IN your retirement accounts. The FAFSA does not ask for this. There is speculation that some Profile schools might use this information…especially if it appears that the balance in the tax deferred retirement accounts is way out of line with the actual income…just like stated in post 11!
Why are pre-tax accounts disadvantageous? They cut down on the tax bill. If you contribute to post-tax accounts instead, you’ll have the same bottom line income as you do if you add back pre-tax contributions.
Some CSS Profile schools do NOT add back in the pre-tax contributions to available income, while others may do so, or do a portion of. I have been told that several schools will add back in any amount over 6% of income - typically what a lot of companies match on.
The FAFSA means nothing for most CSS Profile schools - other than to identify Pell grant eligibility since that is the same for all schools, using the FAFSA formula.
My pups, at Columbia and Stanford, which both use the CSS Profile, end up with EFC far lower using the school’s CSS Profile formula, than the pure FAFSA would have calculated.
Kind of doesn’t matter how the institutions deal with our pre-tax contributions. When you are like the OP and our family and you have a housing allowance and in some countries a cost of living allowance on top of that, we are not going to come up as showing much “need” even if the base salary isn’t that high. The state department sets the housing allowance for various locations around the world and it is adjusted for family size. Our housing allowance is ridiculous, but that is because the rent in this country is ridiculous. The apartment we get for that money is certainly nice enough but fairly basic, and not anything like what we could get for the same amount money in the US, even in a fairly expensive city. We have to put the amount we get for housing on the FAFSA and CSS Profile and once you add that to the income we are quickly launched out of the “need” zone.
If someone in our situation doesn’t want to fund that 250,000+ four year program out of pocket, the only option is to seek merit. It is just the way it is. Certain schools are just not an option in that case. I am just glad that I learned this fact before my daughter applied to college. Seeking merit worked extremely well for her.