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 workthere. 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 notsubmitted 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.) One can play what-if games with a college's net price calculator to explore the impact of an income reduction on the net price. The net price calculator provides a ballpark estimate of the remaining costs after subtracting grants. All colleges have been required to provide a net price calculator on their web sites since October 29, 2011. One could also use the College Navigator tool created by the National Center for Education Statistics (NCES) at the US Department of Education. This tool includes tables that show the average estimated net price for various income thresholds at each college. In-state public colleges and the six dozen colleges with generous no loans financial aid policies tend to have the lowest net price for low-income students. To affect eligibility for need-based financial aid during the freshman year of college, an income reduction would have to occur at least one calendar year prior to enrollment. For example, the FAFSA is based on the prior tax year's income, so income would have to decrease the year before the FAFSA is filed to have an impact on that year's expected family contribution. Since each FAFSA controls only one year of eligibility for financial aid, the income reduction would have to continue through the end of the tax year prior to the start of the student's senior year in college. The FAFSA and most financial aid application forms look only at the prior year's income when evaluating eligibility for need-based financial aid during the subsequent award year. The main exception is when a family seeks a professional judgment review to appeal for more financial aid because of volatile income (i.e., the income during the prior tax year was unusually high, not reflective of ability to pay during the award year). If the family's income varies considerably from one year to the next due to the nature of the wage-earner's employment, some colleges will use an average of the last 3-5 year's income to smooth out the volatility. The EFC is also based on the family's assets, not just income. The FAFSA will ignore all assets for a family that qualifies for the simplified needs test. (Likewise for a family that qualifies for auto-zero EFC.) Typically a family must have less than $50,000 in annual income and be eligible to file an IRS Form 1040A or 1040EZ to qualify for the simplified needs test. There are other criteria that can substitute for the income tax return requirement. Even if the family doesn't qualify for the simplified needs test, money in qualified retirement plans and the net worth of the family's principal place of residence are ignored, as is about $40,000 to $50,000 in other parent assets. The CSS Financial Aid PROFILE form, however, is used by about 250 colleges to award their own financial aid funds. This form does not have a simplified needs test and may consider the net worth of the family home and excessive retirement assets. A family with low income but significant assets might not qualify for institutional grants at some of the more expensive colleges.
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