Behold, FAFSA season is upon us! Well, not entirely– the FAFSA isn’t available until January 1. Nonetheless, confusion and questions about the FAFSA abound already.
One of the more confusing aspects of the FAFSA is how retirement plan contributions are counted. “Wait,” you say, “I thought my retirement plan doesn’t count on the FAFSA!” It’s true that your retirement plan balance doesn’t count as an asset. However, your discretionary contributions to the plan in the base year (the year ending December 31 of your student’s senior year in high school) do get added back to your income.
What are discretionary contributions to a plan? They are contributions you choose to make. (Let’s not get into a philosophical discussion about whether a responsible adult “chooses” to make contributions to their retirement plan!) Did you contribute to your 401(k) plan? That’s a discretionary contribution.
On the FAFSA, once you’ve completed information about your AGI and certain other tax-related questions, you’ll be prompted to report Untaxed Income. This includes “Payments to tax-deferred pension and retirement savings plans” and “IRA deductions and payments to self-employed SEP, SIMPLE and Keough plans.”
So in a sense, contributions to your 401(k) during the base year and college years hurt you in two ways:
- They reduce the amount of cash flow you have available to pay for college, and
- They reduce one of your biggest allowances against income: federal taxes paid.
Here are some tips for those whose students aren’t high school seniors yet: If you don’t max out your 401(k) each year, then max it out the year before you’ll be filing and contribute less in your base year. That will both reduce the amount you add back to income and increase the deduction against income for federal taxes you pay in the base year. If you do max out your 401(k) each year and can afford to continue doing so during the college years, consider switching to the Roth option (if your employer offers it) during the base year and college years. (You may wind up contributing less if you’re looking at tax-adjusting your contribution.) Or make IRA contributions (traditional or Roth, depending on your AGI) in the year before your base year and reduce your base-year 401(k) contributions by a comparable amount.
Wondering what the student debt picture looks like at schools you’re interested in? The New York Times has a new calculator here that shows specific schools’ graduates’ average debt levels, plus what the monthly payment on those debts looks like, how much interest you’ll pay, and how much the new graduate would need to earn in order for that debt to be affordable.
The calculator defaults to Stafford loans’ interest rates and a 10-year repayment term, but lets you change any of the input values and model making a larger payment. As to affordability, it shows both the rule-of-thumb of borrowing no more than your anticipated first-year salary, and the salary that would be required to limit your debt repayment to 20% of discretionary income. (The site defines discretionary income as the income exceeding 150% of the federal poverty line for a single person.)
Colleges are either need-blind or need-aware in their admissions policies. A college that is need-blind makes acceptance decisions without considering a student’s financial need or ability to pay. A college that is need-aware will consider what the student can pay when evaluating their application. So need-blind must be better, right?
Well, not necessarily. The fact that a school maintains a need-blind admissions policy does not mean that it meets student financial need. For example, Carnegie Mellon University is need-blind in admissions, but only meets full financial need for 27% of undergraduates.* This can result in students being accepted but not being able to attend.
And the fact that a school is need-aware does not mean that need will factor into every applicant evaluation. Financial need is a bigger issue for marginal applicants; strong applicants who bring exceptional GPAs, test scores and class rankings are desirable commodities whether or not they can pay. A need-aware school might reserve a portion of its admissions slots– say 25%– for those who can pay full fare. Outside of the most elite schools, colleges will not just admit but actively recruit (through scholarships and other perks) top applicants regardless of ability to pay.
So, what do you need to do to improve your admissions chances at a need-aware school? Make sure you’re at the top of the applicant pool academically. Then the school will want you regardless of your ability to pay.
Many borrowers, especially parents and grad school graduates who took out PLUS loans, are stuck with high fixed interest rates on their student loans. In the past year, though, several companies have started refinancing services that seem to be above-board and might be worth a look.
Credible provides a marketplace in which graduates can complete a single profile form with their loan and income details and get refinancing offers from multiple lenders.
SoFi is a peer-to-peer lending service that offers loan consolidation for both private and federal loans.
Before you get too far down the path to refinancing, though, there are several things to consider:
- Interest rate: A good rule of thumb is don’t refinance unless you can get a fixed interest rate that’s at least 1% lower than your current rate. Otherwise it’s not worth the hassle.
- Federal loan protections: When you consolidate/refinance through a private lender, you lose eligibility for some of the federal loan protections including income-based repayment, hardship deferrals and public sector work forgiveness. If you are taking advantage of any of those, then refinancing is probably not for you.
- Graduates only: Each of these services is for graduates only. That means that if you did not complete your degree, or if you are still in school, you are not eligible.
These services are fairly new. If you have any experience with them, or any others, I’d love to hear about it!
The #1 way to keep college costs down is of course to minimize the amount of time spent in college. Many people rightly focus on getting college credit prior to enrolling as a college student. There are several main ways of getting these credits:
- AP or IB classes and tests
- Community colleges
- Online courses
Before packing your schedule with these classes, though, it’s worth finding out what colleges do with these credits. Dartmouth, for example, recently stopped giving credit for AP classes. Other institutions may offer general credit hours, but not placement or course-specific credit (i.e., elective credit versus credit for having taken a specific class). In other cases, a student might get placement out of a particular class for either an AP/IB or community college class but not get credit hours. And of course the type of credit given may vary depending on the course and the test score.
Community college and online courses can be more tricky and, sometimes, a bit of a double-edged sword. The University of California system, for example, will only give credit for a community college class taken if that class was not used to satisfy a high school graduation requirement.
And why is community college credit sometimes a double-edged sword? Because some students arrive at college with so much credit that they are required to declare a major before they even set foot on campus. That may work well for a highly-directed student, but most 18-year-olds don’t fit that description.
So, while earning college credit through high school and community college coursework is often a great way to keep the cost of college down and to ensure on-time graduation, it’s worth looking at how the colleges you are interested in treat that credit before you load up on the classes.