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Suppose you don't contribute to a 401k in prior and prior-prior years of FAFSA filing and:

Total Cost of College is $60,000
Expected Family Contribution is $50,000
Financial Need = $10,000

Do you think the formula or the college admissions office will alter the EFC or finanical aid offer if you instead contributed $18,000 to your 401k in those years.


I think the EFC will go up as your fed taxes paid go down -- by about 25% of your contribution, so 18,000*.25 = $4,500. And if you're in the 25% marginal rate you'd save that same amount in reduced Fed taxes. So, that would almost be a wash (though you'd shelter more money for future FAFSA application years by moving assets to 401k). I'm curious if the college might go further and reduce any scholarships/grants/aid if they see that you are able to contribute full or part of your financial need amount into your 401k every year. I'm about to embark on the first of 10 years of FAFSA/CSS forms for my 3 kids and would like to continue to contribute to my 401k but I fear it might hurt me more than it helps me in the end.

Any thoughts are appreciated.


Any ideas?
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FAFSA counts your prior-prior-year pre-tax 401K contributions as income for that year.
The benefit of 401K contributions lies in the tax deduction, plus the fact that the $18000 contribution can't later be counted among your liquid assets.

For upper-middle class folks, the marginal EFC offset is 47% for income, 12% x 47% = 5.64% for liquid assets, and 40% x 12% x 47% = 2.256% for the value of your business.

https://ifap.ed.gov/efcformulaguide/attachments/1920EFCFormu...
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You can find the EFC formula at https://ifap.ed.gov/efcformulaguide/attachments/071017EFCFor...

401k contributions are added to taxable income and taxes paid are subtracted. So contributing to a 401k doesn't lower your income, but it does lower your taxes, giving a larger "available income" and higher EFC. If income is assessed at 47%, then 47% of your tax savings goes to a higher EFC. You still come out ahead. The other benefit is that the funds in the 401k are invisible in future years. Assets outside the 401k are assessed at 5.6% so if you have removed those assets from FAFSA calculations for 10 years, you reduce EFC over 10 years by 56% of your contribution.
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Thanks for both your replies

My primary concern is, merit/need aid is ultimately at their discretion so are they likely to reduce aid if I'm maxing out my 401k? ie. This applicant can stop contributing to his 401k and pay us full rate. Again, I am looking at years 2,3,4,5,6,7, etc... and am assuming I will still try to max out my 401k all those years if it doesn't penalize me with aid awards.
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bankersfate: "Thanks for both your replies "

The prior responders have been addressing the FAFSA - Free Application for Federal Student Aid

Some schools, mainly private schools, also require completion of College Scholarship Service Profile (CSS Profile) - see https://cssprofile.collegeboard.org/
It is my understanding (though I have never completed one) that it asks for far more information than a FAFSA, including, IIRC, value of 401k and IRA accounts and equity in your home.

The following colleges, universities, and scholarship programs use CSS Profile® and/or IDOC as part of their financial aid process -

https://profile.collegeboard.org/profile/ppi/participatingIn...

Not certain whether this will make a difference to you, but posted to be complete.

Regards, JAFO
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My primary concern is, merit/need aid is ultimately at their discretion so are they likely to reduce aid if I'm maxing out my 401k?

Merit and need-based aid are different animals. Merit aid awards don't look at your finances, they are just based on merit.

I have never heard of any school doing what you are concerned about. They do add the retirement contribution back to your income for the year in question, but I have never heard of them looking at other years. FAFSA doesn't ask about retirement account balances.

Also, note that most schools do not guarantee to meet financial need, so even if your EFC is less than the cost, you may not get any need-based aid. The schools that do meet financial need are elite private schools and require the CSS/Profile in addition to FAFSA. CSS/Profile does ask about retirement accounts, and private schools that use CSS/Profile can do whatever they want, but from what I have read they do not use the balance in retirement accounts to determine financial need.

Lot's of things in the financial aid game are murky but I decided to keep contributing to my retirement accounts while my kids are in college. The importance of having assets for retirement and the shielding of those assets from the aid formulas made it an easy choice for me.
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Some schools, mainly private schools, also require completion of College Scholarship Service Profile (CSS Profile) - see https://cssprofile.collegeboard.org/
It is my understanding (though I have never completed one) that it asks for far more information than a FAFSA, including, IIRC, value of 401k and IRA accounts and equity in your home.


Correct. The CSS asks A LOT of questions and many schools have supplemental questions for the CSS asking for even more information. I had to answer questions about our house, our cars (make, model, year), and lots of pain in the butt stuff I don't exactly remember. I was really happy this year I only had to do the FAFSA. Also, the FAFSA is free, the CSS is not.
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The prior responders have been addressing the FAFSA - Free Application for Federal Student Aid

Some schools, mainly private schools, also require completion of College Scholarship Service Profile (CSS Profile) - see https://cssprofile.collegeboard.org/
It is my understanding (though I have never completed one) that it asks for far more information than a FAFSA, including, IIRC, value of 401k and IRA accounts and equity in your home.


We completed a FAFSA, and also the forms for another kind of financial aid but I don't remember what it was called (2007). It wanted to know the value of all homes, but didn't ask for IRA or 401k balances. It was nosier than the FAFSA for income, though. I think I recall the FAFSA using lines from the 1040 tax form, but you can game that (a little). A salaried person maybe can't, but a company owner can choose to have the company provide a car and other stuff in lieu of a salary that a person would use to pay for those items. Also, he (or she) can opt to take a small salary in the year that the forms are looking at, then give himself (or herself) a big bonus in some other year. That other form made it harder to game the income, IIRC.
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