We are a family of 4 with gross income of about $58,000. With IRA
and 401(k) contributions and pretax health care deductions our AGI is
about $47,000. Would it benefit us as far as financial aid grants go
to max out on our retirement accounts and knock our family AGI down to
about $30,000 or less? Or do the aid people see the gross income of
$58,000 and ignore the $30,000 AGI? Next fall one child enters college
and one will still be at home.
— Michael B.
The basic philosophy of need analysis is to assess a portion of
discretionary income, which is calculated by subtracting
non-discretionary expenses from total income. IRA and 401(k)
contributions are considered voluntary and so will be added to
adjusted gross income when calculating total income. Thus your IRA and
401(k) contributions will be counted, and maximizing your
contributions will not reduce your expected family
contribution. However, the pretax health care deductions, including any
flexible spending arrangements (cafeteria plans), are ignored by the
formula and so will increase aid eligibility.
There are two important thresholds on adjusted gross income in the need
analysis formula, one at $50,000 and one at $30,000. Families that
satisfy certain other criteria are eligible for the simplified needs
test when their adjusted gross income is less than $50,000. The simplified
needs test ignores assets. Families that satisfy certain other
criteria are eligible for automatic zero EFC when their adjusted gross
income is less than $30,000. As the name suggests, this sets the
expected family contribution to zero, allowing the applicant to
qualify for a full Pell Grant.
Your income is quite close to the $50,000 threshold. If you have
significant assets other than the family home, retirement accounts,
and a small business, it may be worthwhile to consider ways of
reducing your adjusted gross income below the $50,000 threshold. The
most common methods include realizing a capital loss of up to $3,000,
maximizing cafeteria plans, and using the tuition and fees deduction
and the student loan interest deduction. (However, the Hope
Scholarship tax credit may offer a better financial benefit than the
tuition and fees deduction, so you will have to evaluate the tradeoffs
of using the tuition and fees deduction instead.)
The need analysis formulas are heavily weighted toward income, so
reducing your adjusted gross income will also decrease your expected
family contribution and increase eligibility for need-based financial aid.
Even though your retirement plan contributions do not affect your
eligibility for need-based financial aid, you should continue
contributing to your retirement plans. Contribute at least enough to
maximize the employer match, if any, as that represents free money.
What are my options are for receiving hardship support to assist in
paying for my daughter's college education? My son was diagnosed with
cancer in 2005. Since then the medical bills have drained my savings.
Even though I make a decent living, finances are tight. In February my
son's cancer returned requiring very aggressive chemotherapy and
medical care. My daughter has received scholarship money but it is not
enough. My income as reported on the FAFSA does not reflect my
expenses or situation.
— Martin S.
Ask the college for a professional judgment review. Some colleges call
it a special circumstances review or financial aid appeal. The college
will want documentation of your son's situation. A letter from his
doctor and copies of one year's worth of unreimbursed medical bills
should be sufficient. If the college financial aid administrator
determines that your situation merits an adjustment, she will reduce your
income on the FAFSA by the amount of your unreimbursed medical
expenses. (The amount of the reduction may be slightly less, to the
extent that medical expenses are already considered by the income
protection allowance in the need analysis formula.) This will decrease
the expected family contribution and increase the amount of financial aid.
There are also several scholarships available for siblings of children
who have had cancer. You can find a list of such
on the FinAid site at finaid.org/cancer.
Tell the dean of student affairs at the college about your family's
situation. The dean can alert the college's counseling staff to pay
extra attention to your daughter, since she may be worried about her
brother's health. A cancer diagnosis is stressful for the entire family.