Cutoff for F-Aid

Paying for College
21

<p>Thumper, the regular Profile asked for 401K information this year (not the supplement) -- I hadn't seen that in previous years. But now they wanted it. </p>

<hr>

<p>Sblake wrote:
[quote]
2. Best not to fund retirement accounts in the year before applying for aid, as it increases EFC due to reduced federal income tax that year.

[/quote]
I did the math -- if you contribute to a tax-deductible plan (like 401K), you will always save more money in taxes than you will lose in the increased EFC. So if you have the funds available, it is best to keep contributing. Essentially your choice is pay $1 to the college or $2 to the IRS. (My ratio is wrong, and of course depends on tax bracket -- but the point is the overall tax savings are greater). Keep in mind that income total is the same either way, whether you contribute to the 401K or not -- so the only increase in EFC is the percentage that the college is assessing from what you didn't pay in taxes, which at most is about 46%.</p>

<p>In other words (again, made up numbers:)</p>

<p>Your income is $50,000.
You contribute $5000 to your 401K.
You are in a 15% tax bracket, so you save $750 in taxes.
Your EFC goes up by $345. </p>

<p>Personally, I'd rather give money to my daughter's college than the IRS, so I'm contributing to retirement at least as long as I have the funds to do so.</p>

22

<p>Thanks Calmom. The 401K line on the Profile must be a new one. Still...can someone verify that the colleges are USING this number as an asset? Maybe Nikki can answer that one. As I said earlier, in many cases these funds cannot be touched until a person is 59 1/2 years old. Some plans will allow a contributor to borrow against their retirement accounts, but many do not have this provision. Plus...the the retirement money was pretax (as most are), the person using any of these funds would be paying taxes on them if used. For all of the above reasons (and I'm sure others) the retirement accounts have previously been exempt from the asset calculation. I know some of the more prestigious (in many people's eyes) schools use the Profile, but if they are now using retirement savings...this is one more reason why FAFSA only schools would be a better choice for many when finaid comes into play.</p>

23

<p>What's frustrating is that all of the financial analysts tell you to have (readily available) 6 months worth of living expenses in case of sudden layoff, etc. So that money cannot be in a "retirement account". It is expected to be used for college and then if something happens to your job - bam. A little scary. It would be nice if a certain amount of liquid savings could be considered "sheltered" as well, just so you had a safety net. JMO</p>

24

<p>PA Mom, I believe a certain amount of your savings IS "sheltered"...not used in the finaid calculations. But it is NOT 6 months worth of salary for folks in the "middle/upper middle" earnings category. Also, getting laid off from a job IS considered a special circumstance. I'm not sure how many colleges actually do pony up money for those with this situation, but when we had it a few years ago, we had our letter ready to go...then a new job materialized. Another thing that complicates this for the middle/upper middle earner, is that often a severance package is part of the job layoff...and that is considered income.</p>

25

<p>That's good to know thumper1. I hate to think that people won't have some readily available savings for emergencies!
For anybody with answers I have a question - wouldn't most of the "financial aid" given to those in the upper ends of qualification be in the form of loans anyway? Does it really pay to shelter your money or spend down your savings ( as I have heard of some doing) and then have to take out a loan.? ...Why not just pay with what you could have saved? Just curious. I'm obviously not too savvy with this game.</p>

26

<p>PA Mom...I'm not positive about that protected assets, but I do believe that there is something there. Even the finaid folks don't expect you to spend every cent you have on college expenses...although I do confess that most of us are doing that!!! Re: spending down savings...we did this only for essential purchases for our KIDS upcoming college expenses. Both got new musical instruments for example (and both needed these). I have read about folks buying cars, remodeling their homes, etc. That is not what we did...just seemed to risky. With finaid awards the way they are, we felt that any money for optional expenses was better saved in case we needed it for college. Neither kid goes to a 100% full need school, and our "gaps" were substantial. I'm glad we had the cash...I don't think the colleges would have taken a new stove as payment:)</p>

27

<p>I'm not too sure about colleges using Retirement Fund in FA calculations. Our school relies solely on information reported on the FAFSA. Your FAFSA EFC is all we care about. And to be quite honest, I haven't ever looked into Profile or anything else....it's difficult enough to keep up with the regs for FAFSA alone.</p>

28

<p>Our son's school asked for the amount we had in retirement accounts, but in meeting with the director of financial aid it was explained to us this was not being looked at as a true "asset" but was looked at in terms of how well funded our retirement savings were at this point in our lives. They adjusted our son's financial aid award upward since my husband's IRA is "underfunded" based on his age. It was explained to us that they would expect that we would need to increase the contributions to our retirement accounts so we can catch up to where we should be.</p>

29

<p>Momof2sons</p>

<p>Wow! Thanks for sharing that!</p>

30

<p>You're welcome--it came as a surprise to us but they really were quite understanding of the challenges we parents face with saving for college and funding our retirement accounts at the same time.</p>

31

<p>The FAFSA formula protects a certain amount of PARENTAL assets, beyond property and retirement accounts. So, for example, if parents report assets of 35K in checking and savings accounts, and 100K in retirement accounts, all of it is protected from the aid calculations.</p>

<p>The exact asset protection allowance depends on the age of the older parent. For a two parent family, with older parent between 45 and 49, for example, the asset protection allowance is $45,300. If the older parent is between 50 and 54, the allowance is $51,500. The allowance is less for a single parent.</p>

<p>So, for many people whose primary assets are their home and some retirement accounts, with a modest amount in checking/savings/stocks, little or none of their assets will be assessed and contribute to increasing the FAFSA EFC (and thereby decreasing aid). Home equity is protected, retirement accounts are protected, property (like cars) is protected, and up to around $45K or more in checking/savings/stocks are protected. </p>

<p>When you hear advice about spending down assets, it's usually in term of the student's assets. Students don't get any asset protection allowance, so their checking/savings/stocks/bonds get assessed severely, increasing the EFC from the first dollar, thereby decreasing aid dramatically.</p>

<p>The Institutional Methodology (Profile) does things differently, and uses an Emergency Reserve Allowance to shelter some assets, an amount which varies depending on the number in the family. A family of 4, for example, will automatically have $24,260 in reportable assets (cash, checking, savings, stocks, bonds) sheltered.</p>

<p>Profile also calculates an Educational Savings Allowance of at least $20K (usually more, depends on number of kids and their ages) which is designed to shelter savings intended for college. Very low income families also get a third asset allowance, the Low Income Asset Allowance.</p>

<p>So, like with the FAFSA, for many families, their non-retrement savings will be less than the asset allowances calculated by the formula, and none of their reportable (non-housing) assets will contribute to their EFC. The big difference, of course, between FAFSA and Profile is that Profile does consider some home equity as a reportable asset (using different methodology at different schools), while FAFSA does not.</p>