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Can a Family on Fixed Income Afford to Pay Double for an Out-of-State Private College?

Mark Kantrowitz

August 16, 2010

My husband took early retirement so we are on a fixed income. We set aside enough money in various college funds for our daughter to attend any in-state public college. However, she is interested in an out-of-state private college that costs approximately double what we have saved. We are researching scholarship opportunities but wonder how the fact that we are retired will be evaluated in the financial aid application process? — Elizabeth J.

Money in qualified retirement plans like a 401(k) or IRA are not reported as assets on the Free Application for Federal Student Aid (FAFSA). The current year’s contributions to retirement plans, however, are added back to adjusted gross income and treated as untaxed income to the extent that such contributions are discretionary in nature. Money that is not in a qualified retirement plan, however, is reported as an asset even if you are already retired. The net worth of your principal place of residence is also ignored on the FAFSA.

The federal need analysis formula also includes an asset protection allowance that shelters a portion of parent assets in taxable accounts based on the age of the older parent. For example, the asset protection allowance is about $80,000 for a parent age 65 or older and about $50,000 for a parent age 48, the median age of parents of college-age children.

Income is assessed the same way regardless of whether you are retired or not. However, parents who are on fixed income often have lower income, which may qualify for more financial aid. If your adjusted gross income is less than $50,000 and you are eligible to file an IRS Form 1040A or 1040EZ or satisfy certain other requirements, you will qualify for the simplified needs test, which ignores assets. If your adjusted gross income is less than $30,000 and you satisfy the other requirements, you will qualify for automatic zero EFC, which will make your daughter eligible for a full Pell Grant.

If your husband retired recently, the previous year’s income might not be reflective of your ability to pay for college. If so, you should ask the college for a professional judgment adjustment based on the change in income. The college is not required to make an adjustment, so it pays to be polite, but if they make an adjustment it can have a big impact on your daughter’s eligibility for need-based financial aid.

Given that you are on fixed income, your ability to stretch to pay for a more expensive college is limited. While you may get a bigger financial aid package because of the greater cost, you will be paying about three-fifths of the added cost out of pocket or through additional student loans. The total amount of college debt at graduation will likely be at least 50% higher.

Generally, it is not a good idea to take on more debt if you are retired, since your ability to repay the debt is limited. If you were to default on the Parent PLUS loan, the federal government can garnishee up to 15% of your Social Security benefits to repay the debt. Income-based repayment is not available for the Parent PLUS loan.

If you convince the college that your financial circumstances limit your ability to repay the Parent PLUS loan or that you are likely to be denied the Parent PLUS loan, the college has the authority to grant your daughter increased unsubsidized Stafford loan limits. These are the same loan limits available to independent students. However, these loan limits are only $4,000 a year higher during the freshman and sophomore years and $5,000 a year higher during the junior and senior years. That increase is unlikely to be sufficient to cover the cost of a higher-cost private college.

It is also unreasonable to expect your daughter to take on that much debt on her own, even if she’s the one choosing the more expensive college. Borrowing more than $10,000 per year of school is excessive and she will experience some difficulty repaying the loans. Even if she works full time in the summers, she will probably graduate with more debt than most of her peers.

Review your finances, but you may discover that your main choices are between saying no to your daughter or coming out of retirement to pay for her education at the more expensive college.

This is a good opportunity to teach your daughter about budgeting and living within one’s means. College is the start of her transition from a sheltered existence to the real world.


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