It’s not unusual for different strategies to be more helpful at different points in the college savings/funding process. Retirement contributions are a perfect example.
For many families, it’s beneficial to use Roth contributions in FAFSA years because the additional taxes paid reduce EFC. Taxes paid are subtracted from available income, so a family in the 22% tax bracket who maxes out Roth IRAs instead of traditional IRAs for both spouses would see their EFC reduced by $1,240. ($12,000 x 22% marginal tax rate x 47% marginal EFC income assessment rate = $1,240.)
However, if that family is approaching the income limit for the American Opportunity Tax Credit (MAGI of $160,000 for married filing joint in 2019), then contributing to Roth IRAs in a year in which their student is in college might leave them unable to claim the AOTC. The AOTC is worth up to $2,500 per year, per student, so it’s often worth more than the EFC savings. But there may be circumstances where parents want to do additional analysis, such as if the student is at a financial aid “threshold” amount where adding $1,200 to their EFC would result in a larger loss of aid. This might be the case for a student receiving a subsidized loan, for example.
For families looking at this situation, the key piece is whether they’re receiving need-based aid or on a need-based aid path for subsequent students. If the student is receiving need-based aid, it’s worth a conversation with the school’s financial aid office to confirm that you are not shooting yourself in the foot if you change your retirement savings contributions to maximize AOTC eligibility. And for those with additional children approaching college age, it’s a good practice to try out some net price calculators at schools of interest to determine the impact.
Worth noting: Although a student attending college for four years will have college expenses in five tax years, the AOTC can only be claimed for four years. Given the FAFSA and Profile using prior-prior year incomes (i.e., the FAFSA families complete for the 2020-2021 school year will use 2018’s income), there are a maximum of two potential years of overlap per child between AOTC and EFC. Families with multiple students will have more such years.
Upon graduation, student loan borrowers have a 6 month grace period during which time no loan payments are required to be made. Sounds great, right? For many borrowers with “getting started” expenses like security deposits and moving expenses, the grace period can be a real lifeline. However, any payment you can make during the grace period is highly beneficial because unlike a traditional loan payment that is part principal and part interest, a payment during the grace period results in a dollar-for-dollar reduction in the loan balance. Huh? Continue reading Loan Payments in Grace Period
I get tons of questions about strategies for reducing EFC, especially those related to the Asset Protection Allowance. And there are plenty, but sheltering assets is typically the lowest bang-for-the-buck strategy out there: Every $1,000 you shelter will only reduce your EFC by $54. And that assumes that the school will meet your full need. Here are some better options: Continue reading Better EFC Strategies
When you start looking at specific colleges, net price calculators are the best tool to figure out how much the school will actually cost– especially since they will show the aid package including self-help aid (loans and work study). Anyone who has gone through this process knows that the net price tends to differ quite a bit from EFC. And only the FAFSA provides an EFC, so you’re definitely going to get a different cost from a school that requires the CSS Profile. Which begs the question, does EFC matter? Continue reading Does EFC Matter?
Community colleges are often promoted as a great way for students to start on the path to a four-year degree: they’re lower cost than four-year colleges and it’s more likely the student can live at home to save additional money. However, a recent study showed that while 81% of students entering community colleges aspired to a bachelor’s degree, only 14% actually earn one within six years of starting at a community college. In fact, only 1/3 of community college students in the study’s cohort even transferred to a four-year institution. Continue reading Community College as a Pathway to a Four-Year Degree
One of the bigger frustrations about 529 plans that I hear from parents is their reliance on investments to fund college. In the early accumulation years, parents don’t like the seemingly large allocations to fixed income that many plans have. As college nears, parents’ fears tend to group around two risk factors: market risk, whereby you might lose some or all of your savings in a poorly-timed market downturn; and inflation risk, where a conservative investment allocation means your savings are losing purchasing power due to inflation. Continue reading Late-Stage College Savings Strategies
As conditioned as we are to thinking about college as a seller’s market where schools have all the leverage, the NACAC College Openings Update, published every May, serves as a reminder that for the majority of schools, students are in the driver’s seat. Continue reading NACAC College Openings Update 2019
Many financial aid awards include work study. Typically work study is awarded in a dollar amount per academic term, for example $1,000 per quarter. Which leaves a lot of people wondering what it means and how you get it. Continue reading What is Work Study?
Of his two college choices, my son is leaning heavily towards the more expensive one. (Good news: it’s not as much more expensive as we had originally thought, but still around $4,000-$5,000 more for freshman year, including transportation– not exactly chump change.) We tasked him with finding some ways to bring his costs down and we’ve been pleasantly surprised with what he’s learned. Continue reading Finding Money
Many people asked, after my last post, how EFC gets calculated or divided with multiple children in college. It’s not a strict 50/50 division; some adjustments get made first. Continue reading EFC for Multiple Children