Going through the FAFSA process for the first time this year and found the request to enter 401K for the current year off my W2 strange. Since 401K savings already accumulated aren’t considered. I suppose the thinking is that you could have used the current year’s deferred salary to fund college…but is this what is intended?
Is the message: great that you have saved previously but now that your kid is entering college you need to stop saving for retirement and use that money to pay for college?
If so, another reason the FAFSA form/process is in need of reform.
Yes, that is what is intended. They consider the money valid for either use. This is IMO an attempt to level the playing field for people who don’t have access to 401Ks. It really has little impact overall. The FAFSA is only used for Federal aid. That’s a Pell Grant of <$6K and a loan of $5.5K. The CSS Profile is much more restrictive in how it uses the numbers.
Yes, apparently their logic is that you should sacrifice your future to fund your kid’s college. You can just work a few more years, right?
I hope your kid doesn’t apply to a school that requires a CSS profile. They want to know everything.
I think the point is that it is income and all your income counts, taxed or not. This way you can’t put extra large contributions during years you are collecting aid to avoid counting it. So really it is more an apples to apples comparison with other student’s EFC. I don’t think it is meant as a signal not to save for retirement. Both retirement and college have to be planned for, for the most part. And past contributions don’t count in assets. CSS Profile schools are the ones that give the big aid for the most part.
Yes, but usually the years your children are in college are the very years you should be putting extra large amounts into your 401k because foolishly you were wasting retirement money on daycare and diapers in the early years. My employer matched up to 10%, so it would have been like taking a pay cut, never mind the tax cut, to stop making 401k contributions.
True, but from the college’s POV why should they offer you a discount on their services to make it easier for you to fund your retirement? Your logic makes sense, but I don’t think it makes sense to view it as the college giving you retirement planning advice. They’re not punishing you for saving, they’re just choosing not to subsidize your savings with extra financial aid money.
(It might end up not mattering either way though.)
Thanks for the comments and education… luckily kid #1 didn’t apply to schools that wanted CSS profile.
@Erin’s Dad: it did impact our EFC as computed by FAFSA significantly…
dmitriR, it isn’t the college giving the ‘discount’ off the FAFSA, it is federal aid. Colleges can use the FAFSA if they want to, but the purpose of it is to determine federal aid.
It doesn’t make sense that tax law and social security benefits and fAFSA based awards are all at odds with each other.
That’s a good point. All I can say is that they were written at different times by different people for different reasons. It’s unfortunate, but that’s kind of what happens when you try to use tax law to encourage people to do things. You putting money into 401(k) is principally for your benefit; the government gets something out of it indirectly but it’s still your money in a tax-deferred account for your benefit. You get the current-year tax benefit with the contribution and you get to spend the money later when you retire, so I guess they didn’t really think that people needed to also get increased access to federal financial aid.
I kind of wish everything was aligned more neatly though so that families who do use 401(k)s have an easier time affording college without compromising their retirement savings.
I guess this is a little off-topic though… 
@LCalum I didn’t intend to say it doesn’t affect your FAFSA EFC. I meant it won’t matter a hill of beans for FA. Your FAFSA EFC only gets you $11.5K. FAFSA schools pretty much just gap you. That’s why it’s usually important to look at in-state public schools where you get a built in discount.
FAFSA and schools that use profile or their own finaid forms are trying to determine one thing. How much should a family be able to contribute to their kid’s college education given their financial circumstances. Families are on the hook for paying for college first. That’s a different purpose than what the other two are trying to accomplish. So yes, the regs will be different.
Finaid is other peoples or entities money that someone is asking for. In the case of federal and state aid based on FAFSA, it’s my money, your money and other taxpayers money that people want. I’m all for enabling low income kids to attend college. But the vast majority of low income college students in this country and the majority of all college students in this country, live at home and commute to a local CC or public 4-year school. Being able to reside in dorms or off-campus but not with parents is a luxury good. I don’t think people should expect taxpayers to contribute to luxury goods. If colleges are going to contribute their own money to luxury goods, yes they are going to take a hard look at the family’s finances. Again, families are on the hook first for paying for college just like everything else in life.
IMO, if a family can’t afford both to save for retirement and pay for college, then less expensive college alternatives need to be chosen.