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
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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
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
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