Income and college financial aid formulas

[ecmcn]

It seems to me one of the benefits of early retirement wrt paying for kids' college is that a reduced income would qualify us for more financial aid, although I'm not that familiar with how the formulas work re total assets. Does anyone have any experience with getting kids through college while retired?

I understand that a 529 fund does count towards total assets while a 401k and IRA do not. I'll be almost 59 when my oldest child starts college, which puts me in a good position to be able to use the retirement accounts (without penalty) to pay for it if I'd like. I'm trying to decide if I should be funding 529s for the kids.

Eric

[James81]

I would challenge you to challenge your kids to pay for college themselves. That's not to say that you are completely unwilling to help (as a parent, I think a little financial help for your kids in college is ok), but, for the most part, the whole searching for how to fund college process is an excellent teaching experience for you kids to learn a little about how to handle money.

It's also a good motivator for them to get good grades in school so that they qualify for scholarships.

My $0.02.

[ecmcn]

I agree about them paying for it, and that discussion will be in the cards. My parents offered to pay for my college, but I ended up paying for about 75% of it through work and scholarships (taking 5 years instead of 4 as a coop student). I have no idea what road my kids will take, but unless they turn out to be total s&%!heads (joking, kids!) I'd like to be able to provide a similar option to them. But I also don't want to overinvest in a 529 and then have kids that get full rides, or decide to pay for it themselves or whatever.

It seems a risk of a 529 is much more than just what return it'll yield, since the amount you'll need could be anywhere from zero to med school.

[econberkeley]

Pretty much all the top schools calculate the certain percentage of assets when they come up with the financial aid package. However, they usually exclude the retirement assets and house equity. If you have $500,000 or more outside of retirement and equity money, you offspring will probably not qualify for grants. You can use net price calculator to get a sense of their financial aid formula. Also, most of the top schools do not give many merit scholarships except for Rice, Vanderbilt and few more.

[Grigory]

Unless they've radically changed the FAFSA application for the Pell Grant, they only ask you how much money your parents made last year. With other financial aid programs, things might be different, but in my experience the bulk (if not the entirety) of the scholarship package is based on your FAFSA results. Your kid should do just fine. :)

[arebelspy]

I understand that a 529 fund does count towards total assets while a 401k and IRA do not. I'll be almost 59 when my oldest child starts college, which puts me in a good position to be able to use the retirement accounts (without penalty) to pay for it if I'd like. I'm trying to decide if I should be funding 529s for the kids.

If you're deciding between retirement accounts and a 529, max the retirement accounts.  Especially if you'll be at an age where you can access them penalty free, because then you can use it on education, or not, rather than having it "earmarked," as it were.

I have heard various things between them looking at assets or looking at income, but the former seems more common (with retirement accounts not counting, so again, max those).

[LadyStache]

The balance of your 401k and IRA does not count as an asset. The amount of money you contribute to your pretax retirement accounts each year gets added back into the income you report. The 529 counts towards total assets, so it is suggested that is be put into the parent's name to count as a parent asset, which is counted more favorably than a child's assets. I think the parents have an allowance of around $40,000 in reported assets that will not be counted towards your expected financial contribution (EFC). I think if you're withdrawing money out of your 401k for this, it would be treated as income which could increase the EFC. It might be better to do a 529 as long as you have no other assets besides your retirement accounts and the home you live in because you do get the allowance and because it would not count as income when you withdraw.