Should Wealthy Parents Cut Family Income Tenfold to Help their Children Qualify for Need-Based Student Financial Aid?
April 09, 2012
My wife and I make about $150,000 in combined income. We have probably $350,000 in home equity, $100,000 in rental property equity and $500,000 in retirement accounts. We have three kids in college and a fourth starting in the fall a year from now. We hope to quit our jobs at some point and move to Nicaragua (or another Central American country) so my wife can teach English and I can do service work there. My wife will make under $20,000 and I will probably make nothing. As I understand it today, we don’t qualify for any financial aid (except loans) due to our income. We have about $80,000 in 529 money which we hope will get everyone through one or two years of college, but are hoping our reduced incomes will allow them to qualify for free grant money once we ‘drop out’. We have not submitted a FAFSA yet because we don’t want any record of our current income to show up later when the kids apply for grants. How low do our incomes need to be to get free grant money? What is the best timing for us to quit our jobs? Is there any harm submitting a FAFSA now, and having a record of our high incomes, or do they ONLY look at the past year? — Randy B.
If a family’s primary reason for “dropping out” is to help others, that is commendable.
But the grants are not always greener on the low-income side of the fence.
Low-income students do tend to qualify for more need-based grants. But slashing income to help the children qualify for more financial aid usually does not yield enough additional grant aid to compensate for the lost income. Many colleges do not meet the full demonstrated financial need of their students, leaving a gap. Financial aid packages also include loans, not just grants. Financially, $150,000 in income yields more money after taxes to pay for college than the $5,000 to $10,000 in average grants per child received by a family with $20,000 to $25,000 in annual income. Some colleges provide more grants, but these colleges are also more selective.
There is no specific income cutoff on eligibility for need-based grants. Instead, eligibility is based on financial need, which is the difference between the cost of attendance (COA) and the expected family contribution (EFC). Financial need increases with increases in COA or decreases in the EFC. But financial need is usually met with a mix of loans and grants, not just grants. Expensive private non-profit colleges typically award most students grants that cover one third to half of the cost of attendance, but that still leaves the student and parents with tens of thousands of dollars to be paid with savings, income and loans.
(The Pell Grant is based only on the expected family contribution. As discussed in Ask Kantro: How Much Income is Too Much When Applying for Need-Based Aid?, most Pell Grant recipients have family income under $50,000. To qualify for a full Pell Grant, the student must have a zero EFC. The income threshold for an automatic zero EFC will be $23,000 in 2012-13.)