How do parent contributions to 401(k) or IRA retirement plans
affect financial aid eligibility?
— Stephen C.
The federal need analysis methodology considers both income (taxable
and untaxed) and assets that are reported on the Free Application for
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Federal Student Aid (FAFSA).
Money in qualified retirement plans, such as a 401(k), 403(b), IRA,
pension, SEP, SIMPLE, Keogh and certain annuities, is not reported as
on the FAFSA.
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However, voluntary contributions from the taxpayer to these retirement
plans during the base year (the prior tax year) are reported on the
FAFSA and are counted as untaxed income
. Employer matching
contributions are not reported on the FAFSA. Untaxed income and
benefits have a similar impact on aid eligibility as taxable income.
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Non-elective contributions, such as mandatory teacher contributions to
a state retirement system, are not reported on the FAFSA and are not
considered in need analysis.
What happens when you have all your retirement in savings accounts?
Will FAFSA take that into consideration when determining financial
— Stacey C.
Money in non-qualified retirement accounts, such as a savings or
regular brokerage account or stuffed under your mattress, should be
reported on the FAFSA as an asset. This is the case even if you are
already retired and will be using all of your assets to pay for your
The federal need analysis formula shelters assets in qualified
retirement plans, the net worth of the family's principal place of
residence and small businesses owned and controled by the
family. There is also a simplified needs test that excludes
consideration of all assets for families where the parents' income
(dependent students) or student's income (independent students) is
less than $50,000 and certain other criteria are met. For all other
assets there is an age-based asset protection allowance that shelters
some of the remaining assets based on the age of the older parent. For
age 65 and up in 2009-10 this allowance is $84,000.
If you receive a lump-sum distribution from a qualified retirement
plan, it is best to roll it over into an IRA or other qualified plan
in order to shelter it from need analysis.
Does the FAFSA have some mechanism where parents ages are
identified and considered? It seems unfair for parents who will be in
their early 60s when the child graduates to have the same expected
family contribution as a parent in his or her late 40s who has 15 more
years of earning potential. If not, would it be helpful or
detrimental to politely point out to a financial aid office the burden
that loan-only aid would place on a family who has little or no
savings and where both parents will be retiring soon?
— Leah G.
For a dependent student, the FAFSA asks for the parents' date of
birth. This is used to calculate the age of the older parent and to
trigger the asset protection allowance. However, the impact on aid
eligibility is relatively small. The asset protection allowance in
2009-10 for retired parents is $84,000 while the asset protection
allowance for parents aged 48 (the median age of parents of
college-age children) is $52,400. This leads to a difference in the
expected family contribution of at most $1,782.
The Student Aid and Fiscal Responsibility Act of 2009, if enacted,
will eliminate all six asset questions from the FAFSA. This would
eliminate any penalty for saving, even if a family saves for
retirement in non-qualified accounts.
College financial aid administrators do not have the authority to
increase your aid eligibility because you are close to retirement. If
you have high unreimbursed medical or disability related expenses,
they can make an adjustment to income to compensate. But otherwise the
age of the older parent does not represent an unusual circumstance
that justifies a professional judgment adjustment.
You should not borrow a Parent PLUS loan if you believe that you will
be unable to afford the monthly payments. (The new income-based
repayment plan is not available for Parent PLUS loans.) The federal
government may withhold up to 15% of your Social Security benefits if
you default on your federal education loans. The US Supreme Court
upheld the federal government's ability to do this in Lockhart v US
(04-881, December 2005).
That being said, the regulations at 34 CFR 682.201(a)(3) and 34 CFR
685.203(c)(1)(ii) and (iii) allow a college financial aid
administrator to make a dependent student eligible for the higher
unsubsidized Stafford loan limits available to independent students if
"the student's parent likely will be precluded by exceptional
circumstances from borrowing under the Federal Direct PLUS Program or
the Federal PLUS Program and the student's family is otherwise unable
to provide the student's expected family contribution". You could ask
the school to make your child eligible for the increased unsubsidized
Stafford loan limits because of your lack of savings and imminent
transition to fixed income. Most colleges focus on more extreme
circumstances, such as receipt of only public assistance or disability
benefits or the incarceration or institutionalization of a parent. But
it doesn't hurt to ask. If all else fails, have the parent with the
worst credit apply for the PLUS loan, since a PLUS loan denial will
make your child eligible for the increased loan limits.