I just heard of someone who quit a job to reduce family income, with an eye toward receiving better financial aid when their child applies to college.
Does this strategy work?
Well…they need to do this two years before their kid applies to college. And they need to hope their kid gets into one of the highly competitive colleges that meet full need for all accepted students.
This is not a good strategy, in my opinion. It takes the person out of the workforce in terms of future raises and longevity. They will need to remain unemployed for four years.
If they have savings significant enough to support their living expenses for four years, they might not qualify for need based aid anyway.
This is a bad idea for all of the reasons noted above.
Financial aid is only a percentage of income so by not working, you lose one whole income in order to gain a percentage of the cost of attending. It might depend on particulars, such as the pay level for the job, the financial aid policies of the school and so on.
If your salary is $70k and you quite two years in advance of your kid attending, and stay unemployed for 4 years, you would lose $560k. Tuition, room and board of $70k times 4 is $280k. Oversimplified but just taking a stab at an example.
Who is to say that there will be significant financial aid, other than loans, in the future?
Sounds ridiculous to me. Although I know a few very unhappily married couples who got divorced white the kids were sophomores in high school. Worked well for the one who got into CMU!
But were the divorced parents cooperative enough for both to complete FA forms and contribute money for the kids’ college costs (CMU requires the CSS Noncustodial Profile in divorced parent cases)?
People make all sorts of dumb financial decisions. Some are small-- a few hundred bucks a year in over-insuring. Some won’t have ramifications for years- like not updating your beneficiaries for your retirement accounts so that your (now hated) ex-spouse gets everything when you die. Some are stupid but seem rational- paying for dental insurance, or vision insurance, when you know it will never pay out- but it feels “safe” to have it. Some are made out of ignorance- like assuming that it’s too expensive to make a will-- “but my kids know what my wishes are”.
And some are like the OP’s situation- dumb on so many levels that it’s hard to know where to start. I’ve seen some of these geniuses- their kid ends up at a college that doesn’t meet full need, really doesn’t care how you’re going to pay for it because they offer a token merit aid award to everyone they admit. And you’ve given up years of income in the process. Or kid decides college isn’t for him- but he’d love 10K in seed money to open a landscaping business- and already has customers lined up based on his years of lawn-mowing and leaf raking- but the 10K isn’t there because everyone assumed “financial aid will pay for college” so no need to save. Or the OTHER parent loses his/her job and now the family has two unemployed adults-- there is no financial aid at Stop and Shop or the gas station.
But like I said- people make dumb decisions all the time. I live in a town where after 2008 there were couples where BOTH lost their jobs (one worked at Bear Stearns, the other at Lehman), their house was immediately underwater when property values dropped dramatically, AND their retirement savings were tied up in the stock of their own companies. (now almost worthless). College was the least of their worries…
I went back to work despite serious illness when S1 went to college because our EFC caused serious pain, despite many years of frugality. We were trying to avoid parent loans at all costs and have reserves for my ongoing medical bills.
Because of new major health problems, I suddenly was out of the work force halfway through S2’s college. FA went up by $1500, which didn’t begin to cover the difference in our ability to pay. We had to hit the HELOC to pay tuition.
No way would I quit a job to get more FA. Odds are that schools will just give you more loans, not grant $.
@ucbalumnus they actually were. I think divorce was a happy relief for both by the time it finally happened - other issues that delayed it from happening.
But seriously…if you could afford to quit a job for financial aid, why not just work and sock all that money away for a few years leading up to college and pay for it?
The job in this case was not a high paying one.
I suspect there is some wishful thinking going on.
So it’s not a job where they could have asked for deferred compensation?
It is possible that one parent quitting a low paying job may make the household financial situation better if the other parent continues working at a decent paying job, if the parent quitting the low paying job eliminates the cost of hiring others to do things that this parent can now do as a stay-at-home parent. Or if this type of thing is approximately break-even financially, then a small effect on college financial aid may tip it to be slightly favorable.
But obviously, that involves a particular set of conditions, rather than being generalized to any situation of reducing labor income to get more college financial aid, which in most cases is net unfavorable since the college financial aid gained is generally much less than the amount of labor income reduced.
Maybe they think their kid will go to X College where it’s free for parents making less than 75K or whatever.
For the most part, it’s unlikely to be beneficial.
If the kid has inherited any of the parents smarts college might not be an issue.
“Maybe they think their kid will go to X College where it’s free for parents making less than 75K or whatever”
That’s where I thought the parents’ thinking was going. If there are two wage earners each making $50K, and one quits a couple of years before the kid applies to colleges, the new income of $50K could qualify for a free ride. Now let’s say the worker gets 40K after tax, if you could get in to the X college, you pay nothing according these colleges and save up to 75K. Now a family making $100K will still get a decent amount of FA, but you don’t get the disadvantaged hook in admissions. Lot of moving parts.
Really the only way to game the system is if you own your own business. Instead of taking a salary you take loans from the company to pay your bills. After college is over you pay the loans while getting a higher salary.
This also only works if the business is small enough you don’t have to report the value of the business on the FAFSA.
And that won’t work for schools that use the CSS Profile. They are wise to that and include the value of the business as an asset for the family.
Considering the fact that most of these schools have a 10% or less admit rate, what happens if the admission does not go as planned?
Considering that there are approx. 20million people out of work, it may be a very crowded field