Author Topic: Has anyone stopped/changed 529 contributions due to new FAFSA rules?  (Read 3083 times)

kpd905

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I have two kids (5 and 2) and had been putting ~$3,000 a year into each of their 529s to max out our state tax deduction amount.

I see that the new FAFSA rules have resulted in an auto-zero EFC and full Pell grants for an income (AGI) of $29,000.  This number seems achievable, especially if we redirected the 529 contributions to a taxable account and then possibly pay off the mortgage when we FIRE.  The P+I portion of our mortgage is only about $700 a month, but that is still $8400 less income for FAFSA and possibly ACA purposes.

I have also thought of having a grandparent do all the 529 contributions instead, since grandparent 529s no longer have any effect on FAFSA at all.  Is there any way to someone move a 529 from me to the grandparent?  Guessing not.

Just wondering if anyone has made any changes or has any input.

reeshau

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #1 on: October 27, 2022, 06:04:03 AM »
Are you saying you are thinking of exchanging a the kids' college for a mortgage payoff?

It seems to me, with a goal to minimize your AGI, you would want all the tax-sheltered money you could get.  Switching a 529 for taxable means withdrawals (gains) are going to be taxed and added to AGI.  529 withdrawals and Roths would not.

I know you can take 529 withdrawals to match scholarships.  If that is also true for grants, then you can effectively do both from the 529, anyway.

kpd905

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #2 on: October 27, 2022, 05:01:07 PM »
Sorry, I wasn't clear.  The taxable account would be a mortgage payoff fund, so we could pay off the mortgage before the kids went to college, thus keeping AGI low for FAFSA.  I'd rather put it in taxable than make direct payments to the mortgage (at 2.5%), so it is liquid. 

We could potentially use the entire taxable fund for the mortgage payoff, thus having all assets in retirement accounts and house.

We already out all tax advantaged accounts possible.
« Last Edit: October 27, 2022, 05:05:08 PM by kpd905 »

secondcor521

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #3 on: October 27, 2022, 06:10:34 PM »
I have two kids (5 and 2) and had been putting ~$3,000 a year into each of their 529s to max out our state tax deduction amount.

I see that the new FAFSA rules have resulted in an auto-zero EFC and full Pell grants for an income (AGI) of $29,000.  This number seems achievable, especially if we redirected the 529 contributions to a taxable account and then possibly pay off the mortgage when we FIRE.  The P+I portion of our mortgage is only about $700 a month, but that is still $8400 less income for FAFSA and possibly ACA purposes.

I have also thought of having a grandparent do all the 529 contributions instead, since grandparent 529s no longer have any effect on FAFSA at all.  Is there any way to someone move a 529 from me to the grandparent?  Guessing not.

Just wondering if anyone has made any changes or has any input.

The idea is good.  With your scenario, I'd do some rough math to make sure you'd be able to pay it off by the time your eldest child is approximately a junior in high school - if you're not able to pay it off, then either (a) the idea won't work, or (b) you'd only be able to refi/recast to a smaller mortgage payment, which would mean the idea would work partially (but probably mostly).  I bet you've already thought of that aspect, though.

I paid off my mortgage early and retired early, which has enabled me to make my AGI pretty much whatever I want.  My low living expenses are funded by a side gig and some modest withdrawals from taxable, which are lightly taxed anyway.
 This has been helpful for ACA subsidies and FAFSA purposes - my younger two kids are college aged now.

You can change ownership of the 529 from you to a grandparent.  Just contact your 529 custodian and ask for the proper forms.  The only drawback I see here is loss of control if the grandparents might become uncooperative.

The auto-zero EFC amount of $29,000 is actually the existing law (https://fsapartners.ed.gov/sites/default/files/2022-08/2324EFCFormulaGuide.pdf).  FAFSA simplification appears to provide even more ways to get auto-zero EFC.  I recommend reading the law very carefully and thinking about what is possible:
 https://www.congress.gov/116/plaws/publ260/PLAW-116publ260.pdf beginning on page 1958, paying particular attention to page 2013 around the area of "A student shall be eligible for a total maximum Federal Pell Grant for an academic year".

It's unclear when FAFSA simplification will go into effect, but it probably will by the time your little ones have started!  (See https://www.insidehighered.com/news/2022/10/10/groups-sound-alarm-about-fafsa-simplification for example.)
« Last Edit: October 27, 2022, 06:29:10 PM by secondcor521 »

reeshau

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #4 on: October 27, 2022, 07:04:51 PM »

I paid off my mortgage early and retired early, which has enabled me to make my AGI pretty much whatever I want. 


I am coming to the end of year 3 of FIRE, and also find this to be true.  While your income is never equal to your spending if you are a big saver, I found the degree of disconnect almost disorienting at first.  I could get very close to $0, on up to as high as I want, driven by Roth conversions.

This has also meant tax returns start early; I no longer wait foe the deep discounts on software, because I want as close to the "real" rules as possible, as I make my end of year tax moves.

meadow lark

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #5 on: November 14, 2022, 08:40:23 PM »
Ooh,  I didn’t know grandparent 529’s don’t affect FAFSA!  That was one reason I wasn’t particularly planning on doing one for my grandson.  Now I have a new plan!

kpd905

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #6 on: November 15, 2022, 09:52:29 AM »
Does anyone know if there is any tax implications if you change the custodian from parent to grandparents?  I currently get a state tax deduction, so could I keep getting that for 10 years, then change the account to be in the grandparents name right before the FAFSA window opens for my kids?

EverythingisNew

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #7 on: January 13, 2023, 02:04:03 PM »
Updated: I just read about the assets and income for the Pell Grant and FAFSA. They say that parents can contribute 5% of their non-retirement and non-primary home assets to a child’s college per year. The income limit for Pell is low (FIREd could qualify). The average Pell Grant is $5197, so not enough for the average 4 year college tuition. If you don’t qualify for the Pell Grant, FAFSA gives you federal student loans (questionable on if these need to be paid back - I think once we have a recession the government will be more interested in giving money to people in poverty than student loans). Our family will probably not be able to qualify for Pell because we have more in brokerage than retirement. We will have the kids take out federal student loans and pay for the rest. Our best bet at free college money is scholarships and using our dual citizenship for foreign universities.
« Last Edit: January 13, 2023, 03:44:48 PM by KateFIRE »

secondcor521

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #8 on: January 13, 2023, 04:04:25 PM »
Our family will probably not be able to qualify for Pell because we have more in brokerage than retirement.

Maybe.  Maybe not.

With FAFSA simplification, there are ways to get the maximum Pell Grant based on AGI in relation to FPL - it's either 175% or 225% of FPL for your family size depending on your filing status.  There are also ways to be exempt from asset reporting, so you would permitted to not report the brokerage balance and it would therefore not affect Pell eligibility.

lhamo

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #9 on: January 13, 2023, 04:43:41 PM »
Our family will probably not be able to qualify for Pell because we have more in brokerage than retirement.

Maybe.  Maybe not.

With FAFSA simplification, there are ways to get the maximum Pell Grant based on AGI in relation to FPL - it's either 175% or 225% of FPL for your family size depending on your filing status.  There are also ways to be exempt from asset reporting, so you would permitted to not report the brokerage balance and it would therefore not affect Pell eligibility.

We appear to be in this position, even though I reported all assets (including cash savings and taxable investment accounts) on our FAFSA application.  I thought the latter would disqualify us from Pell, but our EFC is showing as $0.  Won't know for certain until we get our formal financial aid offers from schools, but I think what happens is if you agree to the automatic import of your tax info into the FAFSA, then a low on-paper income overrides the other categories.


secondcor521

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #10 on: January 13, 2023, 06:04:53 PM »
Our family will probably not be able to qualify for Pell because we have more in brokerage than retirement.

Maybe.  Maybe not.

With FAFSA simplification, there are ways to get the maximum Pell Grant based on AGI in relation to FPL - it's either 175% or 225% of FPL for your family size depending on your filing status.  There are also ways to be exempt from asset reporting, so you would permitted to not report the brokerage balance and it would therefore not affect Pell eligibility.

We appear to be in this position, even though I reported all assets (including cash savings and taxable investment accounts) on our FAFSA application.  I thought the latter would disqualify us from Pell, but our EFC is showing as $0.  Won't know for certain until we get our formal financial aid offers from schools, but I think what happens is if you agree to the automatic import of your tax info into the FAFSA, then a low on-paper income overrides the other categories.

Yup.  If your federal AGI was below $29,000 and/or certain other conditions apply, you'll get what's called auto-zero EFC.  Which is just what it sounds like - your EFC is set to $0 regardless of anything else.  It sounds like you met those criteria.

However, if you're talking about a FAFSA you've already filled out, that is under the current/old FAFSA rules.

FAFSA Simplification, which was incorporated into a bigger bill and became law about a year or two ago:

A.  ...rewrites pretty much all the FAFSA rules.
B.  ...will probably start taking effect with the FAFSA people start filling out later this year for the 2024-2025 aid year.
C.  ...creates more pathways to get full Pell grants (which is different from auto-zero EFC).

There will probably be blog articles on the new FAFSA rules later this year as they begin to roll out.

yachi

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #11 on: January 25, 2023, 10:07:57 PM »
I just filled out a FAFSA Estimated Family Contribution (EFC) worksheet to see how our assets and income would affect everything.  I was surprised that for my firstborn's start date of 2028, there are some money moves I might want to do in 2025.*

We're a family of 6, and this year's income (2nd year FIRED), will be $74K.  We only spend $57K of that, but I need the extra because I'm still setting up a IRA ladder, while selling some stock for current expenses.

We have about $190K outside of IRA accounts, and maybe $10K in Savings/Checking.

Running everything as-is, we got an EFC of $16,000, with about half from our income and half from assets.  That's good news because I "sort of budgeted" $120K for college.  This would put as at about half of that.

If we moved the $190K we keep outside of IRA accounts, our EFC goes down to $6K, which I find really low.  We could do that by spending this down on yearly expenses until then, or by taking it all and paying off the mortgage with it.  I estimate we could do a $49K spend if we paid off the mortgage instead.  I don't think we'd be able to keep our spending less than $29K, especially because we'd have to keep it up for the 11 years we'll have one kid or another in college.

*Because we have this money tied up in investments, I would want to do the moves in 2025, because they'll likely result in some heavy tax gains.  Then 2026 can be a low-withdrawal year.  I'll file those taxes in 2027, and they suggest you file the FAFSA in February of the year your child starts school, so I'd have to use 2026 taxes because 2027 taxes wouldn't be completed yet.

secondcor521

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #12 on: January 26, 2023, 01:03:35 PM »
I just filled out a FAFSA Estimated Family Contribution (EFC) worksheet to see how our assets and income would affect everything.  I was surprised that for my firstborn's start date of 2028, there are some money moves I might want to do in 2025.*

We're a family of 6, and this year's income (2nd year FIRED), will be $74K.  We only spend $57K of that, but I need the extra because I'm still setting up a IRA ladder, while selling some stock for current expenses.

We have about $190K outside of IRA accounts, and maybe $10K in Savings/Checking.

Running everything as-is, we got an EFC of $16,000, with about half from our income and half from assets.  That's good news because I "sort of budgeted" $120K for college.  This would put as at about half of that.

If we moved the $190K we keep outside of IRA accounts, our EFC goes down to $6K, which I find really low.  We could do that by spending this down on yearly expenses until then, or by taking it all and paying off the mortgage with it.  I estimate we could do a $49K spend if we paid off the mortgage instead.  I don't think we'd be able to keep our spending less than $29K, especially because we'd have to keep it up for the 11 years we'll have one kid or another in college.

*Because we have this money tied up in investments, I would want to do the moves in 2025, because they'll likely result in some heavy tax gains.  Then 2026 can be a low-withdrawal year.  I'll file those taxes in 2027, and they suggest you file the FAFSA in February of the year your child starts school, so I'd have to use 2026 taxes because 2027 taxes wouldn't be completed yet.

A few things:

The FAFSA rules are changing.  The rules that the worksheet you filled out might be the old rules.  The new rules will very likely be in effect for your children - they're currently slated to go into effect for the 2024/2025 aid year.  Google "FAFSA simplification" for more details.

You're right that you will use your 2026 tax return for the 2028/2029 aid year.

You can fill out the FAFSA as early as October of the previous year now -- that "February" advice is outdated.  So you can fill out the FAFSA in October 2027 using your 2026 tax return for the 2028/2029 aid year.  This is usually the fall of their senior year so they may be busy filling out college applications at that time too.  Winter break is also a good time to do it.

MMMarbleheader

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #13 on: February 20, 2023, 02:10:52 PM »
Just note that this will probably only work for state schools or private schools with >50% acceptance rates who don't use the CSS profile.

I plan on having enough to pay full for our in state Tuition + room an board in a 529. When my father died and before I went down the FIRE path I put $30k in each. I think I will have my kids visit and apply to in and out of state publics (Maine matches VT tuition), and non-CSS private schools. Vermont recently rolled out free tuition (Pell + State grant) for AGI less than $60k so we probably will be able to get it down to just room and board.

They can apply to more selective ones but I don't want to get their hopes up If they get in and we get not much aid. My daughter loves reading/writing and wants to be an English teacher. I feel like I would break her heart if we toured Middlebury, she got in, and then it's too much. The CSS administrators probably wont look to kindly at a 44 year old with low income and high net worth. BUT I would have enough for her to go to UVM then do a Masters in English at Middlebury.

Net Price calculators for the CSS schools I have been playing around with ($40k income, $750k in brokerage, Paid off house worth $400k) vary between $52k (Mt Holyoke and Northeastern) to $27k (Harvard) so it seems like a crap shoot.

ALL that being said, it has been interesting to see how the full pay parents play the early decision acceptance rates at these top schools. The ED rates are so much higher everywhere. BUT you pretty much need to take how much they give you.

AnotherEngineer

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #14 on: February 20, 2023, 02:56:20 PM »
I have two kids (5 and 2)

I think this is the core of the issue: your kids are a long way from college and it is possible (likely?) that 529/FAFSA rules, tax brackets, standard deductions, not to mention, the fundamentals of paying for or even needing conventional higher education can change dramatically by the time they are college age.

Putting my money where my mouth is, I have $0 in 529s for my three kids, but would have considered it if I would have gotten a tax break. Their limitations make me nervous.

I appreciates GoCurryCracker's writeup on the subject: https://www.gocurrycracker.com/why-gccjr-has-no-529/

kpd905

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #15 on: February 20, 2023, 07:01:40 PM »
I think this is the core of the issue: your kids are a long way from college and it is possible (likely?) that 529/FAFSA rules, tax brackets, standard deductions, not to mention, the fundamentals of paying for or even needing conventional higher education can change dramatically by the time they are college age.

That is true, especially since I just saw that all Wisconsin schools will cover full tuition for families with AGI under $65,000.  I think I may just let their current 529 balances grow and plan a strategy (lots of early Roth contributions/conversions) that will allow us to keep our AGI low during all of the college years.  If it doesn't work out and they have to take out loans, I'd probably just help them pay them off anyway.

EscapeVelocity2020

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Re: Has anyone stopped/changed 529 contributions due to new FAFSA rules?
« Reply #16 on: February 22, 2023, 09:02:18 AM »
Rules change on these things, so I found it to be worthwhile to target ~$100k in a 529 to help defray college costs.  I was able to hit this with a reasonable upfront contribution when the kids were born, then $400/mo.  Kids are 17 and 19 now and somehow the plan has all worked out even better than expected.  An alternative at the time was prepaid tuition, glad I did not go that route.

The 19 yo is attending a technical college, so cost is much less than expected.  I also did not ER after reaching FI, the savings on college expenses had been one of my incentives and that no longer matters.

Good news is, with all these options and flexibility, I will either roll these 529 funds in to my grandchildren's 529's eventually or I'll seed my kid's Roth IRA's with $35k each - You Can Roll Your 529 Plan To A Roth IRA Beginning In 2024

Long story short, I personally believe 529's are worth funding up to a certain amount even if you do not get immediate tax deferral benefits.  All of the capital gains and dividends are tax free when used for qualified expenses, and you now have additional options.

 

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