Kids in college after retirement (lower income version)

[Potstickers]

What the universities are telling you is a technicality. The essays and other information provided on a college application can give a very good indication of the socio-economic background of an applicant even without FAFSA or CSS information. The common refrain I hear from some folks I know that serve on admissions committees is "perhaps what this student needs is to just be given a chance."

Most public colleges and a number of highly selective colleges are need blind: Students are admitted or denied without their need for financial aid entering into the picture. At the public schools, it is often the case that they don't provide enough financial aid. At private colleges, it varies from the incredibly generous schools like Harvard, to NYU, which is need-blind but which rarely provides adequate financial aid.

Many, many other private colleges are need-aware. They consider how much aid you look to need before they make an admissions decision. If you look like you need a lot of aid, they may seriously look at how much they want you before deciding on whether to admit you.

 

[43210]

Thanks again SecondCor521.

One thing I was wondering is that if one converts $X from Trad to Roth, and one also withdraws $X from Roth (same net result as as directly withdrawing $X from Trad, but avoiding 10% penalty), then I believe FAFSA counts this as $2X "income", which is obviously unfair. Also requesting "human intervention" may not help and could backfire. (Perhaps you are Roth converting while spending down taxable, but this double counting is something to watch out for (if I'm not mistaken).)

We have almost everything in Trad space (very little taxable or Roth), so what we need for spending will generally come out as withdrawals from Trad and be taxable income, but more to the point would be FAFSA "income". Without surprise large expense, (which could blowout the FAFSA calculation) we'd normally stay easily below the (Simplified Needs Test) $50k limit, though probably not the (Zero EFC) $25k limit.

We'll need to control "realized" income level, almost all withdrawals from Trad, for 9(?) FAFSA/CSS years, all post-retirement. (We avoid 10% penalty by using 457 account, and probably 403b with age 55 rule.) That will severely limit our ability to Roth convert during those years, but that's okay, I think we can stay in low tax brackets (e.g. 12%) for life anyway.

But I want to avoid the 47% FAFSA "tax" from realizing too much income (actually it's worse, since if we have to withdraw $10k to cover an unexpected $5.3k expense that's like a 88.7% tax on that $5.3k, or even worse considering other taxes) so I'm trying to figure how to ensure we don't have that type of bad year. It seems we'd need a taxable account buffer (Roth is no good, as withdrawals count for FAFSA) for unexpected expenses, (or maybe a source of reasonable loans), but the taxable account hurts as FAFSA assets.

I'm wondering if in the last few (3ish?) years of working I should build up taxable, even though I have enough tax-sheltered space 401/403/457/IRA/HSA, to consume most of my modest income. It's counterintuitive to me to forgo the opportunity of tax-sheltering, but I'm wondering if I should to some extent.

 

[43210]

Can you ask? Sure, you can ask anything. But I wouldn't. I think you risk looking like a special snowflake when you aren't. The financial aid office people are, I'm sure, very very tired of hearing why people are special cases and deserve a break. Some undoubtedly do, but it's far fewer than those who think they do.

That being said, it is commonly stated that if you have a significant event - like a primary breadwinner job loss - that happens after the N-2 year tax return, you should let them know, be prepared to document, and they will adjust. But just asking for N-1 because it works better for you probably won't fly.

On Roth conversions, yes, they count as income and yes, you can ask for an adjustment. In my notes I have the following quote. I don't know where I quoted it from - undoubtedly somewhere on the web that seemed trustworthy to me:

"If the family converts a traditional IRA into a Roth IRA, they should appeal to the college financial aid administrator to get the conversion disregarded as income, assuming that the full amount of the distribution was rolled over into the Roth IRA. The U.S. Department of Education issued guidance in Dear Colleague Letter GEN-99-10 to encourage college financial aid administrators to make such an adjustment."

I found a link to that letter
https://ifap.ed.gov/dpcletters/doc0530_bodyoftext.htm

I really don't want to plan to rely on this, e.g. see this experience.

I asked my FAO about a Roth conversion, and she told me that she would adjust for it. She lied. I challenged her, but she wouldn't back-down. I got slammed pretty hard that year, so I didn't do Roth conversions after that, until I was "out of the woods" FAFSA-wise.

I'd much rather try to understand some complex mechanical formula, and plan accordingly, than deal with unpredictable "human intervention" that could badly throw a spanner in the works.

 

[rayinpenn]

I’ve got a young, bright, female colleague that has a $1,400 a month student loan payment (University of Delaware graduate). Not long ago she told me “Ray It is killing me”. She was out of state so it was pretty expensive. Every time I see her I am reminded of the long term impact of school choices. As I see it there are 3 tiers of schools

The Ivy League
*********************
The well known/respected private or public (I.e. Carnegie Mellon, William and Mary)
Speciality schools (I.e. the Colorado School oh Mining).
*********************
Everyone else

Assuming you are middle class and your child didn’t get a huge scholarship.
If you are fortunate enough to get accepted into an Ivy League school and are majoring in a career where excellent job prospects would fund any debt ..you go.

Well name well respected.- This is where it gets tricky.
We actually live pretty close to Villanova which is ranked one of the best business schools in the country. It’s $68,000 annual estimated cost to attend means a quarter of a million dollar investment over the 4 years. I work with a number Villanova grads, all of them bright, all of them with a student debt load. Sitting next to them are (in State) Penn State graduates who paid roughly half of what Villanova grads paid for their four years. The thing is Penn State along with the University of Pittsburgh and Temple are the most expensive State affiliated schools in the country. Great names and with about half the cost of Villanova a real value. DD went to a satellite campus of Pitt, loved it and it was $7k less than the main campus. Her college grades meant she could go anywhere. She landed a great job and has no student debt to struggle with.

Economy Mode - Up the road from me is Penn State Brandywine with tuition of about 12 grand a year. Some of my sons attend there live at home and perhaps have a small part time job.

In the end it is all about value and choices - two kids sitting side by side doing the same work.. one with $150k of debt and the other with none.

I’m semi retired I’ll be back to 3 days a week after the holidays. My son is a freshmen at Penn State. I just think it is a real value... Choose wisely it doesn’t matter who takes on the debt...it is all about value.

 

[SecondCor521]

@43210, yes, I am living on cash and taxable currently and simply Roth converting to add to the end of my pipeline, which already has 5-7 years of expenses in it depending on how much I spend over the next several years.

One thing to point out is that auto zero EFC means exactly that. They don't care about my AGI or my assets or anything else - my EFC is $0. It takes a little bit of thinking to realize that going this route means I don't have to worry about my son getting a summer job, or spending down his savings on a car, or writing a letter to a (potentially fickle as you point out) FAO to point out that I'm spending some of my money on private high school for his younger sibling, or trying to get all three of my kids to go to college in the same calendar years, or...or...or. I just fill out the first page or two of the FAFSA and I'm done.

Now I imagine this can backfire in any one of a zillion ways, but given my options I think it is the best for me and my kids.

Just because of my situation, I did save up several years of income in my taxable account as you're considering. It wasn't specifically a plan to do it that way, but it looks like it might work out.

@rayinpenn, excellent points. CSM is one of my son's targeted schools; the rest are in that ballpark. In my case, my oldest son chose to go to a cheaper school (free due to a scholarship) over a more expensive school ($30K per year out of state private university) which I thought was a better fit for him. I wonder about that sometimes and so my focus with my remaining two (and the oldest as well for where he may finish) is all about "fit", which is a nebulous quantity but still very important to me. So consider the price tag, yes, but only after you know you'll be able to be successful and be reasonably happy where you're going, IMHO. (And I mean this not to contradict your post but to augment it with something you likely were assuming.)

 

[sengsational]

Roth IRAs are not counted among parental assets on the FAFSA and if you withdraw contributions, they won’t be counted as income either. A parent-owned Roth IRA and withdrawal of only contributions will have zero effect on financial aid eligibility. If earnings are withdrawn, however, they will be reported as parent income and probably have a minor effect.

If you haven't pulled from your Roth yet, or much, your contributions will come out first and have no impact on the EFC.

EDIT: I was surprised by the above, which is why I posted. But it appears to be incorrect. Could have been right at one point... I'm not sure how the EFC formulas have changed over time.

 

[43210]

Roth IRAs are not counted among parental assets on the FAFSA and if you withdraw contributions, they won’t be counted as income either. A parent-owned Roth IRA and withdrawal of only contributions will have zero effect on financial aid eligibility. If earnings are withdrawn, however, they will be reported as parent income and probably have a minor effect.

If you haven't pulled from your Roth yet, or much, your contributions will come out first and have no impact on the EFC.

I was surprised by this comment, so I did a google search and came up with...
It looks like that comes from this
https://www.moneycrashers.com/roth-ira-college-savings-education/
but it is contradicted by this
https://www.edvisors.com/education-tax-benefits/retirement-savings/roth-ira/
and this
https://www.bogleheads.org/forum/vi...sid=406494a724bf3b064b65632621c8cd92#p2310542

 

[sengsational]

You're right

Although a return of contributions from a Roth IRA is excluded from income and, so, avoids income tax, it may have a harsh impact on eligibility for need-based financial aid. A tax-free return of contributions is reported as untaxed income on the Free Application for Federal Student Aid (FAFSA) and other financial aid application forms (such as the CSS/Financial Aid PROFILE form). Untaxed income is added to AGI to yield total income. As much as half of total income will increase the expected family contribution (EFC).

 

[Potstickers]

For financial aid purposes, ignore whether income is taxable or non-taxable. Income is income UNLESS it is specifically excluded. Child support received? Non-taxable but definitely income? Untaxed portion of capital gains? Very definitely income. Value of housing allowance provided to clergy? Income. Value of food stamps? Not income.

 

[sengsational]

"Very definitely" are things on a tax form, whether it ends up being taxed or not. Less definitely if you have to be creative to figure that some weird thing is income, and isn't in a database somewhere.

 

[43210]

I found this (2017-18 - don't know if the next one's out)
https://studentaid.ed.gov/sa/sites/default/files/2017-18-efc-formula.pdf (36 Page PDF)
which pretty much explains the whole FAFSA formula if you trace through the forms and tables.

Here's a link to the 2018-19 version on a different website
https://ifap.ed.gov/efcformulaguide/attachments/071017EFCFormulaGuide1819.pdf (36 Page PDF)

However I realize it doesn't list all the many inputs (e.g. income inputs are aggregated from many separate items). I found this link with those further details, though it's some years out of date (some line numbers have changed, but it's probably similar).
FAFSA Tutorial

For financial aid purposes, ignore whether income is taxable or non-taxable. Income is income UNLESS it is specifically excluded. Child support received? Non-taxable but definitely income? Untaxed portion of capital gains? Very definitely income. Value of housing allowance provided to clergy? Income. Value of food stamps? Not income.

E.g. I see from the last link that e.g. Child Tax Credit is not FAFSA income, but Education Credits is FAFSA income.

I need to dig into the details of this.

 

[43210]

I'm thinking we'll go for Simplified Needs Test most years (main requirement: keep AGI below $50k, which for us will be mostly withdrawals from Trad retirement accounts, no earned income), while keeping other strategies in mind.

EFC will be pretty low, (less than $4k I figure) mainly due to parental Income Protection Allowance of about $33k (will increase with inflation) and assets won't count. (I realize you can get charged more than EFC.)

Also income tax won't be a lot (about 0%*$24k+10%*$19k+12%*$7k = $2,740) and will be wiped to zero by various credits. In fact we won't be able to fully use the refundable credits. The upshot of this is that for many of the years, the Child Tax Credit alone will wipe the tax to zero, and so the American Opportunity Credit will be no use to us. (Some, maybe later, years we'll use it, so I appreciate people pointing out this credit earlier in the thread.)

Of course all the tax and FAFSA formulas and rules keep changing, and you need an adaptable plan, but at least the Simplified Needs Test seems to have been a stable feature for some time.

 

[SecondCor521]

I'm thinking we'll go for Simplified Needs Test most years (main requirement: keep AGI below $50k, which for us will be mostly withdrawals from Trad retirement accounts, no earned income), while keeping other strategies in mind.

EFC will be pretty low, (less than $4k I figure) mainly due to parental Income Protection Allowance of about $33k (will increase with inflation) and assets won't count. (I realize you can get charged more than EFC.)

Also income tax won't be a lot (about 0%*$24k+10%*$19k+12%*$7k = $2,740) and will be wiped to zero by various credits. In fact we won't be able to fully use the refundable credits. The upshot of this is that for many of the years, the Child Tax Credit alone will wipe the tax to zero, and so the American Opportunity Credit will be no use to us. (Some, maybe later, years we'll use it, so I appreciate people pointing out this credit earlier in the thread.)

Of course all the tax and FAFSA formulas and rules keep changing, and you need an adaptable plan, but at least the Simplified Needs Test seems to have been a stable feature for some time.

Emphasis added.

Thanks for this comment, as it may affect my plans. As you note, with the SNT, the EFC is still pretty low. But I did not even think about the fact that I might not be able to fully utilize all of the credits (CTC, AOTC, etc.) - this means that the SNT might be better than auto zero EFC.

One comment, though: the AOTC is 40% refundable, so even if you have a zero tax liability you could still get $1000 back per year (per child? not sure) so it may still be worthwhile.

 

[43210]

^ Carefully run scenarios through tax software for your case (or you may need to make a spreadsheet, but you want to get the rules right, and they can change).

The order of the lines of Form 1040 (or simpler version) matters. (I'm looking at a 2016 Form 1040 so line numbers may have changed.)

50 Education credits from Form 8863, line 19
comes before
52 Child tax credit. Attach Schedule 8812, if required...

then the refundable ones
67 Additional child tax credit. Attach Schedule 8812 (BUT I believe there is no additional CTC if you have no earned income)
68 American opportunity credit from Form 8863, line 8


The trouble is, depending on numbers, Line 50 could eat all the tax liability before Line 52 CTC can get used (and there is no ACTC without earned income).

Anyway, you need to play with the numbers (and consider all your tax situation) to see how Education credits and CTC interact.

Basically you want to see what it costs to push about $50k from Trad to Roth instead of $25k, and it may be that the extra cost is some smallish EFC but no tax, but it may depend on your general tax situation which could differ from ours.

Anyway, I'm just brainstorming.

 

[retiredunder50]

I'm thinking we'll go for Simplified Needs Test most years (main requirement: keep AGI below $50k, which for us will be mostly withdrawals from Trad retirement accounts, no earned income), while keeping other strategies in mind.

EFC will be pretty low, (less than $4k I figure) mainly due to parental Income Protection Allowance of about $33k (will increase with inflation) and assets won't count. (I realize you can get charged more than EFC.)

Don't forget that you also need to be eligible to file a 1040A or 1040EZ. If you had to file a 1040, you don't meet the simple needs test.

 

[Cayman]

Following up on this point.
I called the four schools that my son is considering. All four of them said that the admissions office has absolutely no information on the financial aid status of any applicant and so financial aid status has no impact on admissions results.

That being said, I now wonder if the financial aid offers are impacted by how much a school wants a particular student. I have to believe that they are.

Short answer: depends on the school, and/or department/program.

I worked in higher ed at a large, respected U. The admissions process and the FA process may vary *significantly* from 1 institution to another. Practices will vary, too. I suggest that you continue to check with each institution, when you want/need to know how they make decisions that impact you.

 

[SecondCor521]

^ Carefully run scenarios through tax software for your case (or you may need to make a spreadsheet, but you want to get the rules right, and they can change).

The order of the lines of Form 1040 (or simpler version) matters. (I'm looking at a 2016 Form 1040 so line numbers may have changed.)

50 Education credits from Form 8863, line 19
comes before
52 Child tax credit. Attach Schedule 8812, if required...

then the refundable ones
67 Additional child tax credit. Attach Schedule 8812 (BUT I believe there is no additional CTC if you have no earned income)
68 American opportunity credit from Form 8863, line 8


The trouble is, depending on numbers, Line 50 could eat all the tax liability before Line 52 CTC can get used (and there is no ACTC without earned income).

Anyway, you need to play with the numbers (and consider all your tax situation) to see how Education credits and CTC interact.

Basically you want to see what it costs to push about $50k from Trad to Roth instead of $25k, and it may be that the extra cost is some smallish EFC but no tax, but it may depend on your general tax situation which could differ from ours.

Anyway, I'm just brainstorming.

Good points. Interesting that the order of the credits is reversed between the two sets of lines (education-child then child-education); I wonder if there is a reason for that.

This whole thing is actually bugging me that there is so many interacting pieces and parts that optimizing across all of them is so challenging. In my own case I have cash flow, asset allocation, two different types of college savings accounts, tax credits for children, college, retirement savings, possibly the EITC, IRA contributions, ACA tax credits, FAFSA EFC stuff, CSS/profile.

Most of the time I try to optimize it all but the past few weeks I've felt like I should just use some of my flexibility and pick a "good enough" course and forget about the rest of it. And then I'm immediately back in the, "well, maybe I could do better" camp. Sigh.

 

[NanoSour]

Don't forget that you also need to be eligible to file a 1040A or 1040EZ. If you had to file a 1040, you don't meet the simple needs test.

I did quite a bit of research on this a couple years ago, to include a meeting with the local IRS agent. The key word here is "eligible" to file a 1040A or 1040EZ. You don't have to file either of these; just be eligible to file one.

One situation that may come up is capital gains/losses. In the event you have reportable capital gains, you must file a 1040 and thereby will lose your ability to file for simplified means on the FAFSA. Capital loses are a different story in that you are not required to report capital loses, but you must however correctly carry the lose forward for subsequent years. For example, let's say you have a 100K loss that you are carrying forward and in the current year you have a capital gain of 5K to report. Normally, you would be able to report a 3K capital loss on line 13 of the 1040 and have a new 95K loss to carry forward. In this situation you are technically eligible to file a 1040A or 1040EZ because you are not required to take advantage of the 3K reduction to total income. You would lose out in taxes, but gain significantly on the EFC if otherwise eligible for simplified means.

Note: this is by no means tax advise to anyone. Consult your own tax specialist and abide by the law.

On a personal note, I was planning to use this to get my EFC as low a possible using the simplified means test. Unfortunately, DW picked up a small gig that put us over the 50K so we lost out on the very low EFC as non-retirement assets came into play. In addition, DD ended up attending a small LAC that required the CSS profile, so the whole plan went completely out the window at that point. Her school met 100% of full need, so I was comfortable with it. When it comes to grant/scholarships, I found that the schools with the largest endowments are the one that give out the most money.

 

[43210]

@SecondCor521
Re: complexity of planning.
I think one measure of the complexity is the number of variables you can control/choose.
For example, in my current still working and accumulating situation, there's really just one main variable, namely what amount, X, of my maxed retirment contribution goes to Roth rather than Trad. There maybe all kinds of tax credits and tax brackets that go into determining the tax T(X) paid on X. The graph of T(X) may be crazy looking, but it's just a function of only one variable. The real complexity comes when you have more variables, (e.g. various types of income, or other factors affecting tax) especially if you cannot disentangle their separate effects.

It's true that a multiyear sequence of such decisions is more complex, but I think of it as mainly getting money from Trad to taxable or Roth at low tax rates (including FAFSA effects as part of tax).

It's also true that there are unknowns like future investment returns, tax laws, etc, but I make no attempt to model these, and instead just try to have a general idea of what kinds of outcomes are possible. I think I can mostly, see how to avoid blundering into high tax brackets, e.g. by having RMDs too big. But the one place I fear blundering is all this FAFSA/CSS stuff, because there are scenarios where events could push you to a much higher EFC, and that's the part I want to plan for.

 

[43210]

@NanoSour (and others)
Thanks for the important points about the various conditions for the Simplified Needs Test. Not having to use Form 1040 certainly restricts other financial options (though there are alternative qualifications) but it seems worth doing.

When you say "so the whole plan went completely out the window"

On a personal note, I was planning to use this to get my EFC as low a possible using the simplified means test. Unfortunately, DW picked up a small gig that put us over the 50K so we lost out on the very low EFC as non-retirement assets came into play. In addition, DD ended up attending a small LAC that required the CSS profile, so the whole plan went completely out the window at that point. Her school met 100% of full need, so I was comfortable with it. When it comes to grant/scholarships, I found that the schools with the largest endowments are the one that give out the most money.

are you just referring to the fact that Simplified Needs Test is irrelevant to CSS/Profile. Or did you have some insight into details how CSS/Profile calculated you EFC from your kinds of income and assets.

Our oldest could conceivable get into a place like MIT, and I've played a bit with Net Price Calculators for these places, but I don't know how accurate they are, or if there are exceptional cases where the results are much different (though I don't think we have any "exceptional " finances). I could try and reverse engineer the Net Price Calculators, but that would at best tell me the formula for that Net Price Calculator, rather than really knowing how CSS/Profile works.

You are right that many of these elite schools really do charge a means tested fee, so if you can get in, and the price is reasonable, you've hit the jackpot.

 

[sengsational]

Yep, If you pick a school that tries to manage the "graduating student debt load" statistic, then you're package will include a heaping helping of "institutional grants", which is just their word for "discounts". That's what happened to DD1, who selected an internationally ranked private school. But as I've been saying to my kids for decades, where you got your degree starts mattering less and less over the few years past graduation. Then it becomes the growth of responsibility in the jobs you've held that's important.

 

[rayinpenn]

@43210,
@rayinpenn, excellent points. CSM is one of my son's targeted schools; the rest are in that ballpark. In my case, my oldest son chose to go to a cheaper school (free due to a scholarship) over a more expensive school ($30K per year out of state private university) which I thought was a better fit for him. I wonder about that sometimes and so my focus with my remaining two (and the oldest as well for where he may finish) is all about "fit", which is a nebulous quantity but still very important to me. So consider the price tag, yes, but only after you know you'll be able to be successful and be reasonably happy where you're going, IMHO. (And I mean this not to contradict your post but to augment it with something you likely were assuming.)

I also meant to have said
1. Will the degree lead to a job
2. Will that job fund or justify the debt

A $250K degree from Villanova to teach at the local high school ..starting at $45K? Me i just cant rationalize that.

 

[SecondCor521]

I also meant to have said
1. Will the degree lead to a job
2. Will that job fund or justify the debt

A $250K degree from Villanova to teach at the local high school ..starting at $45K? Me i just cant rationalize that.

Yup, that too. Middle kid wants to be a mechanical engineer and has the chops for it I think. Youngest wants to be an archaeologist but also wants to go to school in Germany, so that should be relatively cheap. Oldest doesn't know yet what he wants to be when he grows up, but has significant interest in biology, writing, and linguistics.

 

[SecondCor521]

@SecondCor521
Re: complexity of planning.
I think one measure of the complexity is the number of variables you can control/choose.
For example, in my current still working and accumulating situation, there's really just one main variable, namely what amount, X, of my maxed retirment contribution goes to Roth rather than Trad. There maybe all kinds of tax credits and tax brackets that go into determining the tax T(X) paid on X. The graph of T(X) may be crazy looking, but it's just a function of only one variable. The real complexity comes when you have more variables, (e.g. various types of income, or other factors affecting tax) especially if you cannot disentangle their separate effects.

It's true that a multiyear sequence of such decisions is more complex, but I think of it as mainly getting money from Trad to taxable or Roth at low tax rates (including FAFSA effects as part of tax).

It's also true that there are unknowns like future investment returns, tax laws, etc, but I make no attempt to model these, and instead just try to have a general idea of what kinds of outcomes are possible. I think I can mostly, see how to avoid blundering into high tax brackets, e.g. by having RMDs too big. But the one place I fear blundering is all this FAFSA/CSS stuff, because there are scenarios where events could push you to a much higher EFC, and that's the part I want to plan for.

I hate to tell you this, but financial planning is easier when you're still working in that your income is mostly a variable you just want to maximize.

Good point to think about it from the point of view of variables to control, rather than factors that affect things. In my situation, my variables are:

1. How much to Roth convert.
2. How much to IRA contribute.
3. How much to save additionally into 529 or ESA, and
4. In two years, how much to pay out of pocket vs. from 529/ESA.

To your last sentence, I was going to say that there aren't any cliffs in FAFSA-land, except there could be - if you have significant taxable assets, for example, going from $49,999 AGI to $50,001 AGI could result in a much higher EFC.

 

[sengsational]

Seems to me there's a whole bunch of cliffs in FAFSA-land....anything that would force you to file a 1040, like $1 of capital gain, would take you from $0 EFC to who knows where.