Can a Family on Fixed Income Afford to Pay Double for an Out-of-State Private College?

Can a Family on Fixed Income Afford to Pay Double for an Out-of-State Private College?

My husband took early retirement so we are on a fixed income. We

set aside enough money in various college funds for our daughter to

attend any in-state public college. However, she is interested in an

out-of-state private college that costs approximately double what we

have saved. We are researching scholarship opportunities but wonder

how the fact that we are retired will be evaluated in the financial

aid application process?

— Elizabeth J.

Money in qualified retirement plans like a 401(k) or IRA are not

reported as assets on the Free Application for Federal

Student Aid (FAFSA). The current year’s contributions to retirement

plans, however, are added back to adjusted gross income and treated as

untaxed income to the extent that such contributions are

discretionary in nature. Money that is not in a qualified retirement

plan, however, is reported as an asset even if you are already

retired. The net worth of your principal place of residence is also

ignored on the FAFSA.

The federal need analysis formula also includes an asset protection

allowance that shelters a portion of parent assets in taxable accounts

based on the age of the older parent. For example, the asset

protection allowance is about $80,000 for a parent age 65 or older and

about $50,000 for a parent age 48, the median age of parents of

college-age children.

Income is assessed the same way regardless of whether you are retired

or not. However, parents who are on fixed income often have lower

income, which may qualify for more financial aid. If your adjusted

gross income is less than $50,000 and you are eligible to file an IRS

Form 1040A or 1040EZ or satisfy certain other requirements, you will

qualify for the simplified needs test, which ignores assets. If your

adjusted gross income is less than $30,000 and you satisfy the other

requirements, you will qualify for automatic zero EFC, which will make

your daughter eligible for a full Pell Grant.

If your husband retired recently, the previous year’s income might not

be reflective of your ability to pay for college. If so, you should

ask the college for a professional judgment adjustment based on the

change in income. The college is not required to make an adjustment,

so it pays to be polite, but if they make an adjustment it can have a

big impact on your daughter’s eligibility for need-based financial

aid.

Given that you are on fixed income, your ability to stretch to pay for

a more expensive college is limited. While you may get a bigger

financial aid package because of the greater cost, you will be paying

about three-fifths of the added cost out of pocket or through

additional student loans. The total amount of college debt at

graduation will likely be at least 50% higher.

Generally, it is not a good idea to take on more debt if you are

retired, since your ability to repay the debt is limited. If you were

to default on the Parent PLUS loan, the federal government can

garnishee up to 15% of your Social Security benefits to repay the

debt. Income-based repayment is not available for the Parent PLUS

loan.

If you convince the college that your financial circumstances limit

your ability to repay the Parent PLUS loan or that you are likely to

be denied the Parent PLUS loan, the college has the authority to grant

your daughter increased unsubsidized Stafford loan limits. These are

the same loan limits available to independent students. However, these

loan limits are only $4,000 a year higher during the freshman and

sophomore years and $5,000 a year higher during the junior and senior

years. That increase is unlikely to be sufficient to cover the cost of

a higher-cost private college.

It is also unreasonable to expect your daughter to take on that much

debt on her own, even if she’s the one choosing the more expensive

college. Borrowing more than $10,000 per year of school is excessive

and she will experience some difficulty repaying the loans. Even if

she works full time in the summers, she will probably graduate with

more debt than most of her peers.

Review your finances, but you may discover that your main choices are

between saying no to your daughter or coming out of retirement to pay

for her education at the more expensive college.

This is a good opportunity to teach your daughter about budgeting and

living within one’s means. College is the start of her transition from

a sheltered existence to the real world.

Source: Fastweb

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