FAFSA and 529 Contributions -added back?

Paying for College
1

I can’t find an easy answer to this question when googling:

When calculating the EFC, does the FAFSA formula add 529 contributions back to the AGI when determining income?

We find ourselves in the surprising position of receiving an end of year bonus in our student’s junior year. We will be putting more money into a 529 in the coming year, but are wondering if it would be better for that initial financial aid determination if we use the bonus to lower our taxable income for this year?

If it matters, we are unlikely to get much (if any) need-based aid. We are working hard to maximize merit aid opportunities. Strong student, likely NMF, 1580 SAT, very high GPA.

2

Your income is…income. If you won’t qualify for need based aid anyway, I’m not sure why you need to go through any financial gymnastics.

Money placed onto tax deferred retirement accounts reduces your taxable income…but those contributions are added back in as income for financial aid purposes…because they were…income.

@BelknapPoint am I correct in saying money placed into a 529 account is not added back in as income for financial aid calculation purposes.

@mommdc do you have the link for this year’s FAFSA formula so this parent can do this…by hand.

Merit aid awards are given to incoming freshmen usually. In most cases they don’t consider your income and assets at all. They are awarded based on the strength of the applicant. While some merit awards do consider financial need, it sounds like your student wouldn’t be eligible for those anyway.

Yes, some schools do require the filing of the FAFSA for disbursement of merit aid…a small number do this.

But if you won’t qualify for need based aid, and you are looking at merit aid that doesn’t consider financial need (which you say you don’t have), I’m not sure why you are worried about this bonus and where it goes.

3

529 contributions are not added back because they were never subtracted from AGI in the first place (maybe for some state returns, but FAFSA goes by your Federal return)

4

Yes, @cshell2 .

Your bonus will count as an asset if you receive it and it’s not spent or put into a qualified account by the time you file the financial aid forms. So you get double hit by FAFSA ‘s formulas, as you include the bonus as income for 2019 when you do next year’s FAFSA, and at 5.6% going towards this years EFC if the bonus is sitting as an asset anywhere that isn’t specifically sheltered. The assets you report on FAFSA are as of the date the form is filed.

Remember that the income used for this current FAFSA for the 2020-21 school year, is that reported on your 2018 1040. It’s your 2018 income. It’s already etched in stone. However, the asset value is as of the date you file FAFSA. It’s wise not to file on payday, not have earmarked money sitting in your account on the date you file FAFSA. It doesn’t matter if that money is deposited into your checking account or is cash under your bed or in a 529. It’s still counted as an asset and it gets hit up 5.6%. If you put it in an IRA or other protected qualified plan, it doesn’t get reported.

5

I didn’t say we don’t have need, the FAFSA EFC is likely to say we don’t have need. As with most families, the EFC is likely to predict we can afford more than we can. We would like to try to maximize whatever aid our child is qualified for. We have more than one child’s education to finance and our other child is a very different student and won’t be as desirable to colleges that are concerned about scores and grades.

While our EFC is likely to make it look like we can afford something close to the full cost of tuition, for LACs or other private schools, we definitely can not. We are in the doughnut hole area of not qualifying for much aid but also not having the assets or income to pay full tuition if our child goes to a private school. We can afford state school, but we can’t afford private schools (my child’s preference) unless there is aid. Every school my kiddo has looked at requires fafsa and most require CSS.

(It doesn’t matter for the fafsa, but our assets & college savings are lower due to a number of years working public-interest jobs and paying back our own student loans. Not complaining about those life choices but when folks get upset that someone at a certain income level doesn’t have the ability to pay full-freight, it is based on a lot of assumptions that everyone has always earned their current income. We just finally paid off law school loans last year and our income has increased a bit as well.)

I don’t agree that schools disregard need/efc/finances for merit awards. It is my understanding that merit is (in some cases) financial aid for wealthier families, a discount to sweeten the pot and make a school more desirable. I have read schools use complicated algorithms/ to figure out exactly how much merit they need to offer to make their offer competitive enough for a student to select their school.

In any case, we were surprised that our income will be higher this year and have only a limited amount of time to make sure we are not making choices that will be detrimental with respect to financial aid. It is our first kid going to college and in trying to understand the FAFSA, it is a bit confusing to say the least.

6

Thank you, CShell2. That is very helpful information.

7

Thank you @cptofthehouse

Our student is a junior this year so 2019 will be the year of our initial fafsa. We won’t have that money as cash by October for her FAFSA filing.

We are leaning toward using some to make a (non-deductible) retirement contribution and some to pay down our mortgage. Those should shelter it from asset consideration, but not income, right? I was just wondering if there were ways we should try to lower our income calculation. If we can’t, we can’t!

Sheltered or not, we think this is probably the best way to allocate this unexpected money, unless it really hurts financial aid calculations.

8

Have you run the NPC’s at the schools you’re thinking of?

There’s really no way to hide it as income at this point. As far as I know there are only a couple things like FSA and HSA contributions from payroll deduction that aren’t added back in, nothing that you can lump sum invest. The question is what to do with it next year before filing FAFSA. If you put it in a retirement account it won’t be counted as an asset, but you won’t have it available to help pay for college either. If you don’t have a lot of savings and are higher income, I would think taking the 5.6% hit to EFC and having the money would be preferable.

9

I will start running NPCs in January. My husband changed jobs in the middle of last year (changing from a partnership to just an employee), so using last year’s tax return was complicated and not particularly helpful due to compensation changes, HSA/healthcare expense differences at each company, etc. Also, this new bonus income was a surprise, so as soon as we see his total compensation at the end of this year, we will be able to have a better idea of NPC accuracy.

We are behind where we should be for retirement and home equity, due to making less money in the past. We are earmarking any raise as college fund money, so there will be an increase this year in our college savings. Once we know what financial aid looks like (april 2021), we can shuffle things around to free up more cash if we really need it. But since that merit aid is likely to carry over for 4 years, we really want to maximize every penny we can get. We are primarily considering schools where we think merit puts total cost of attendance at a level we think we can afford, with our state school as a very good financial back up plan. We won’t be looking at need-only schools.

10

So how do you account for the many schools that have automatic (sometimes very generous) merit awards based on grades and test scores, without ever needing to see any financial aid forms or data on the family’s financial situation?

11

I don’t agree. Most merit awards are a flat amount, like $20k offered to Presidential Scholars, or those with a 3.5/32 ACT, or a chart of which stats get $$$ as merit. There are some merit scholarships that have a need component, but IME those are the smaller amounts, like $2000 to a nursing student with ‘need’ and ‘need’ is not defined. A school can do anything it likes with its own merit money, but I just haven’t seen a lot of merit that considers need.

Could you put the bonus into a 401k or IRA directly from the employer? Yes, that would be added back into the income for the FAFSA but it is going to be income for FAFSA anyway. If you haven’t maxed out your contributions, that’s one way to get it into retirement funds. You’ll save the taxes but it will still be income for 2019 FAFSA purposes.

12

@pickleberry7 I think you are being very thoughtful in considering these issues now (always easier to figure stuff out ahead of time rather than being behind the eight ball). I agree with those saying that it is probably a waste of time to try too many financial gymnastic moves to reduce your family’s expected contribution. Income weighs most heavily, but more importantly over 90% of schools don’t cover full need regardless of what it might be (including EFCs of $0.00).

There are plenty of schools that don’t take into account EFC/financial need/finances when making merit decisions. I know this first hand because we didn’t fill out a single financial form anywhere (FAFSA or CSS) this fall when our oldest applied to colleges.

We determined our firm budget (right around the cost of our state flagship ~$35k/yr) before we helped create a college list with our daughter. The college list we ended up with had colleges with either automatic merit (based on stats) schools and/or holistic merit (looking at whole application beyond stats to determine award, no need component considered). The lower your firm budget number is, the fewer choices you will end up having.

It took a bit more work on the front end to make sure every college our daughter applied to could theoretically come to the mid $30s in cost if she received the merit she was targeting. We had plenty of friendly, direct conversations about cost with Admission Counselors/Directors.

Our budget gave our daughter a large selection of schools that give pure merit (without a need component) from which to choose. The only constraint we found was location if that is a deal breaker. You will have fewer options if your search is targeted to only one area.

The school our daughter choose ultimately came just under $30k/yr after her merit offer. It wasn’t the biggest offer she received by quite a bit, but it was her 1st choice school and it was under her budget limit. Win/win as far as we are concerned.

Figure out what you are willing to pay before you start your college list. Then figure out which colleges will get you to that price. Run some EFCs to give you an idea of what schools would expect you to pay (you don’t need to fill in the personal identifying info to get some estimates) and then make your target list.

Good luck!

13

I don’t have experience with a lot of schools, but the ones DS applied to this year pretty clearly defined the pure merit scholarships from the merit with a need-based component. The pure merit ones were received even before we filed FAFSA at a couple of the schools. Basically, the scholarship came with the acceptance letter. For most, the only application required was the application to the school, with maybe a supplemental essay for a few. No financial info was asked for.

14

At schools that require CSS Profile, many of which do consider home equity in the institutional need-based aid calculation, paying down a primary home mortgage may not shelter some or all of the asset. What kind of non-deductible contribution to a qualified retirement account are you considering? Your options may be limited here, both by the type of accounts available and any applicable contribution limits.

15

If you get the bonus after year end 2019 and it is part of your 2020 income for tax purposes, it will not be part of the 2021-22 FAFSA which will use 2019 income.

As @BelknapPoint brings up, it is not always possible to contribute to a qualified pension plan. If you have a plan at work, limitations may apply.

Once you think the FAFSA EFC has accounted for Every Friggin’ Cent , you may be introduced to CSS PROFILE which then goes for the silver and gold in your teeth. Well, no quite, but your primary home equity, excluded from FAFSA, can be included as an asset for PROFILE schools. These schools vary on how they come up with an Expected Contribution but it’s rare indeed that their numbers are lower than FAFSA EFC. For those looking at going away To college, private colleges, the FAFSA EFC is the lowest you are going to pay unless you get merit money that exceeds that amount. Merit usually reduces need . So you don’t just add that to what you expect to get.

Those schools that use FAFSA only hardly ever meet full need. That number is a MINIMUM you will pay unless you find schools below that cost, or get merit money exceeding it.

If your state gives a deduction for 529 contributions, that might be a place to start putting some college money, and encouraging your student to do the same. 529 assets are treated as parental assets assessed at 5.6% after asset protection rather than the 20% that student money has.

16

I’m confused. A 529 account is a college savings account, not a retirement account.

The bonus will count as income for the year received, and as a parent asset if it’s sitting in a savings account, or 529, on the day FAFSA is filed.

https://ifap.ed.gov/efcformulaguide/attachments/2021EFCFormulaGuide.pdf

17

@mommdc , yes , you have it right. The money will count as an asset wherever it might be sitting on the day FAFSA is filed, whether it is in a 529 or regular account, with the exception being certain qualified accounts like 401k, IRA, HSA

I was suggesting putting some of it into a 529 if OP is in a state where a tax deduction for such contributions from state income tax is allowed. Also, a 529 is a nice thing to have to encourage students to put away some money for college. A student bank account gets hit up 20% on FAFSA. A studebt’s 529 account gets hit up 5.6%. With smart planning Many students can benefit from having zero assets on the day FAFSA is filed.

Also, if OP uses funds to pay down a primary home mortgage, that money would not show up as an asset on FAFSA since primary home equity is not included in assets. But that’s not always the case with CSS PROFILE schools

18

Here are two different articles that talk about schools using merit as a carrot for wealthier families:

https://www.nytimes.com/interactive/2019/09/10/magazine/college-admissions-paul-tough.html

"If colleges were simply giving each student the same 50 percent discount, that would be challenging enough for enrollment managers like Pérez. But the discounts they offer vary widely from student to student. In fact, if you pick any two freshmen at the same college, they are very likely to be paying completely different tuition rates. Those rates are based not on the true value of the service the college is offering or even on the ability of the student’s family to pay. Instead, they are based on a complex calculation, using sophisticated predictive algorithms, of what the student is worth to the college and what the college is worth to the student.

The consultants many colleges hire to perform those calculations — known in the trade as “financial-aid optimization” — are the hidden geniuses of enrollment management, the quants with advanced math degrees who spend hours behind closed doors, parsing student decision-making patterns, carefully adjusting their econometric models, calculating for admissions directors precisely how many dollars they would need to cut from their list price to persuade each specific Chloe or Josh to choose their college. Outside the ranks of enrollment management, the work done by the companies that employ these back-room prodigies is almost entirely unknown. But collectively, they play as big a role as anyone in shaping American college admissions today."

and this one:

https://washingtonmonthly.com/magazine/septoct-2013/merit-aid-madness/

"Either a school offers tuition discounts to students from affluent families, or else those students (and the revenue they could provide) wind up going to other institutions that offer similar or more generous discounts.

There is now a whole industry of consultants who will gladly explain the math—not that it is very difficult to grasp. After all, if a school offers a single low-income student a full scholarship of $20,000, the school may feel good about itself, but it’s out $20,000. But if it can attract four affluent students to its campus instead, by offering them each a $5,000 discount off full tuition, it can collect the balance in revenue and come out way ahead financially. Such competitive discounting to the affluent may not be equitable, and it may not be sustainable over the long term, but once the cycle starts it can be very difficult for any one institution to resist unless they all do.

Today, these tuition discounts usually come in the guise of “merit scholarships,” but often the students who get them are hardly the best and the brightest. For example, 10 percent of college admissions directors at four-year colleges (and nearly 20 percent of those at private liberal arts colleges) admit that they give affluent students a significant leg up in the admissions process—meaning that they are admitting affluent students with lower grades and test scores than other applicants. Indeed, nearly a fifth of all students receiving so-called merit scholarships have less than a B average, and a largely overlapping 19 percent have only mediocre SAT scores, according to a report by the National Center for Education Statistics."

19

With respect to the schools we are targeting for merit, they are 2nd tier LACs that look like they are trying to up their stats and yield. Our kid has the stats/resume to be competitive for T20 schools, but we can’t afford them. After paying for my husband’s fancy T3 law degree only to have him work in public interest/govt (a goal shared by our kiddo), we have a strong opinion about the value of an undergrad even at the fanciest school. We want a debt free undergrad, so she can focus on being able to afford law school (and ideally we would like to help fund that if we don’t incur debt from undergrad), if at all possible.

There are schools that use bigger awards to increase their stats/rankings and a number of awards. We are much more interested in larger competitive scholarships than small merit awards. It is just a different financial aid strategy. Our large flagship state school has full-ride competitive merit scholarships targeting kids with high stats, rather than using those funds for smaller merit discounts for a larger number of students. My husband and I both had a full-ride undergrad because our state school was pursuing that strategy by courting NMFs which increased it’s ranking so much in the last 20 years, that is no longer an option.

We will have several financial safeties (state school, florida schools that offer full-rides to nmf), but while those are great choices, our kid is a LAC kid at heart. We are hoping to find the right fit LAC that wants her…a lot.

20

Yes, merit awards are given to attract the students a college most wants. As a general rule, the schools that least need to attract the students they want, give out thee Ed least merit money, budgets kept into account.

There is also enrollment management where a need aware schools might accept 5 students with need at the $10k level rather than one student needing $50k

IMO, the models have become more complex but the principles has been around for a long time.