I was having a conversation with someone with multiple kids who are spaced enough that they will have kids in college for a long time.
I can understand that the philosophy of “adding contributions back in” is based on the thought that contributions could be suspended during the college years to have more money available for college.
However, shouldn’t there be some kind of limit to that?
I realize that our opinions won’t change anything, but a career is mostly only about 40 years in length, and if people are expected to suspend retirement contributions for 10+ years, particularly during their higher earning years, it just seems unreasonable.
I can understand expecting a 4-5 year contribution suspension, but anything more than that seems too extreme.
I realize that if a change were made, it would be hard to track, so maybe instead the formula should change for everyone so that maybe only 50% of the contribution is added back in.
Does it really matter for FAFSA? I don’t think so. Then you’re left with those schools using the Profile or their own data collection method. Then it’s totally up to them how to consider the money.
Yes, Erin’s Dad. The fafsa calculation also adds back in the retirement contributions.
The Profile asks for balances in those accounts. No one is really sure if or how they are used. Speculation is that the schools want to see if retirement contributions are extraordinarily high given family income. But it’s a guess.
From the year our oldest entered college to the yr her sister graduated from college, was 13 years.
We kept making contributions to retirement during this time. We just made sure to have choices that were affordable.
It’s money the family earned, just like any other money. The family chose to use that income as a contribution toward the parents’ retirement, rather than spend it for college (wisely, in my opinion …). The bottom line is, though, that income is income. Just because the IRS allows a tax break on it doesn’t make it any less income.
I think it’s wise to save for retirement. But I also think it’s not “unfair” to consider the money used to contribute when looking at available income.
Income is income and everyone makes choices about how to use it. The government encourages planning for retirement by offering tax advantages for 401(k)'s, but colleges have no interest in this goal one way or the other, so why should they subsidize this choice?
@thumper1 I should have been more clear. Does it make a difference in FA (even if the FAFSA EFC changes)? I don’t think so. We both know FAFSA only matters for Pell and Direct Loans. The loans are there no matter what. Pell is only for very low income. Most very low income families don’t have a 401K available.
Perhaps they want to convince you that if you use the money to support your adult child in college, that’s really an investment and that child will support you in retirement.
I think in reality they are all caught in the same ever-spiraling price-expenditures war, and consider anything and everything fair game.
Basically, we have collectively balked at the idea of putting the entire charged cost on our children’s backs in the form of student loan debt, so they want us to believe that it’s fair for them to expect us to put their charges ahead of our own long term financial health.
The reality is that their prices have far outpaced inflation and cannot be justified economically.
As long as people continue to pay their price, they will continue to get away with it.
I learned long ago not to expect life to be * fair*.
Otherwise I would expect college presidents to be paid more than the football coaches, and for university profs to have enough hours and salary so they do not have to commute to a second or third campus.
I’d also expect to not see budgets being balanced on the backs of education spending. http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2015/3/27/to-balance-budgets-governors-seek-higher-education-cuts
When schools give more aid, that money has to come from somewhere.
Private colleges can spend their money however they see fit.
If the result of such a practice make more people eligible for PELL, the only result I think we’d see is a change in the standards for qualifying for PELL.
Any change that makes the form more straightforward is a good change, but one of the criticisms of simplification is that more people apply and qualify.
At what income level do you no longer quality for a Pell grant? At what income level do you no longer qualify for a subsidized direct loan? At some income level, it simply doesn’t matter whether it’s added back in or not and if you make enough to be able to contribute significantly to a 401K, is it possible that demographic just doesn’t qualify for anything to begin with?
As someone pointed out above, it’s unlikely that low income families are contributing $10-15K a year to their 401K, and it’s just as unlikely that their kids are going to a $50-60K/yr school without significant non-Federal aid in the 1st place.
Simple (transparent might be a better word) would certainly be better, and as a newcomer to paying for college with many years ahead of me, I do agree it’s confusing.
Well, the system is not particularly fair: parents who have mandatory pension contributions do not have those added back in as part of available income, but parents who don’t have ANY pension plan are penalized. Patently unfair, imo.
For federal aid, I think the only people who may be affected are those in the $60-70k per year earnings. If those parents have lived in the same house, had the same expenses for quite a while, they may be putting $15-20k away in a 401k, and thus a difference in a $40k AGI or a $60k FAFSA income, and that may mean the difference in a small Pell grant or none at all.
I spent a lot of my time trying to convince people at my office making $50k-$60k per year that they should put 10% of their pay into a 401k. The agency matched up to 10%, so that was like a 10% raise, and the tax protection accounted for about 30%, so for every $100 contribution it meant the employee took home about $70 less but got $200 in the 401k. If he is then also going to lose the $1-2k in a Pell grant, then it may not be worth it to him anymore. He may need that $70 in the paycheck, even though that means no $200 going to retirement.
EFC is generally 1/4 of before tax income under six figures, so someone earning $60,000 or $70,000 wouldn’t be eligible for Pell, as their EFC would be closer to $15,000, than zero.
Here is a reference table for 2012-2013 which shows that AGI 80k with 3 dependent children and 1 in college yields an EFC of $9314. You can extrapolate that with 2 in college, the EFC would be $4657 per each which makes them Pell eligible.
I’m sure families can make the choices that work for them, but we could barely afford two kids, eight years apart, I definitely do not see how families afford not only more kids, but closer together.
Of course, our area may be a bit more expensive than some.
