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
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
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
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
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.