Ask for a Professional Judgment Review for One-Time Events
January 16, 2012
In our base year, my spouse will have a one-time job that will significantly raise our income for one year only. We have significant credit card debt and no savings for our child’s college education. We plan to use the extra income to pay down our debt and to have money available to help with college costs. But will this one time boost in our income, which will happen to fall during our base year, limit our access to financial aid? Also, unfortunately, I will be getting income from the sale of my parents’ home, which would also have gone directly to debt reduction/college expenses. The timing of this is unusually bad for us. — B.J.
Having extra money to pay bills and reduce debt is never unfortunate. Even if the money reduces eligibility for need-based financial aid, the family will still come out ahead financially.
The Free Application for Federal Student Aid (FAFSA) considers both income and assets when calculating ability to pay. Extra income during the base year can show up on the FAFSA as both income and an asset. However, if the family uses the money to pay down credit card debt or other forms of consumer debt (e.g., auto loans or mortgages), it can reduce or eliminate the treatment of the money as an asset on the FAFSA. Still, the money will be counted as income on the FAFSA, which can have a significant impact on eligibility for need-based financial aid.
The best solution is to ask the college for a professional judgment review, sometimes called a special circumstances review or financial aid appeal. The goal of need analysis is to use the prior tax year income as a proxy for income during the academic year. So college financial aid administrators are often persuaded by arguments that claim that the extra income was due to a one-time event that is not reflective of the ability to pay during the award year. College financial aid administrators also dislike the double-counting of a windfall as both income and an asset.
The family will need to present documentation demonstrating that the extra income was due to a one-time event that is unlikely to be repeated. The college financial aid administrator may want to see copies of the past 3-5 years worth of federal income tax returns to verify that the extra income was an unusual event.
It also helps to demonstrate that the money was used to pay down debt and is no longer available to pay for college costs (except for any money contributed to a 529 college savings plan).
Is there any way around the fact that we withdrew money from retirement accounts to purchase a house. We are a low-income family but wanted to take advantage of the housing market and reduce our monthly housing costs. Our FAFSA/EFC will be very skewed because of this “taxed income”. We have two children in college and I (mom) will be returning to school on a full-time basis. Any advice? — Jackie A.
Distributions from retirement plans count as taxable income even if the money is used to buy a home, pay for tuition or other hardship expenses. This can artificially increase the family’s income, affecting eligbility for need-based financial aid.
Since this is a one-time event that is not reflective of ability to pay during the award year, the family should ask the college financial aid administrator for a professional judgment review. The family should provide the financial aid administrator with documentation concerning the hardship withdrawal from the retirement plan accounts, such as the amount withdrawn and the purpose for which it was used. It helps to refer to it as a hardship distribution. Note that this situation is similar to the rollover from a traditional IRA to a Roth IRA, where Dear Colleague Letter GEN-99-10 gave guidance to encourage financial aid administrators to eliminate from income the amount attributable to the Roth IRA conversion. As with the Roth IRA conversion, neither the retirement plan nor the family home is a reportable asset on the FAFSA and the family does not have additional available income or assets to spend as a result of the hardship distribution.
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