Questions about retirement plan contributions and help for a student whose brother has cancer

Questions about retirement plan contributions and help for a student whose brother has cancer

We are a family of 4 with gross income of about $58,000. With IRA

and 401(k) contributions and pretax health care deductions our AGI is

about $47,000. Would it benefit us as far as financial aid grants go

to max out on our retirement accounts and knock our family AGI down to

about $30,000 or less? Or do the aid people see the gross income of

$58,000 and ignore the $30,000 AGI? Next fall one child enters college

and one will still be at home.

— Michael B.

The basic philosophy of need analysis is to assess a portion of

discretionary income, which is calculated by subtracting

non-discretionary expenses from total income. IRA and 401(k)

contributions are considered voluntary and so will be added to

adjusted gross income when calculating total income. Thus your IRA and

401(k) contributions will be counted, and maximizing your

contributions will not reduce your expected family

contribution. However, the pretax health care deductions, including any

flexible spending arrangements (cafeteria plans), are ignored by the

formula and so will increase aid eligibility.

There are two important thresholds on adjusted gross income in the need

analysis formula, one at $50,000 and one at $30,000. Families that

satisfy certain other criteria are eligible for the simplified needs

test when their adjusted gross income is less than $50,000. The simplified

needs test ignores assets. Families that satisfy certain other

criteria are eligible for automatic zero EFC when their adjusted gross

income is less than $30,000. As the name suggests, this sets the

expected family contribution to zero, allowing the applicant to

qualify for a full Pell Grant.

Your income is quite close to the $50,000 threshold. If you have

significant assets other than the family home, retirement accounts,

and a small business, it may be worthwhile to consider ways of

reducing your adjusted gross income below the $50,000 threshold. The

most common methods include realizing a capital loss of up to $3,000,

maximizing cafeteria plans, and using the tuition and fees deduction

and the student loan interest deduction. (However, the Hope

Scholarship tax credit may offer a better financial benefit than the

tuition and fees deduction, so you will have to evaluate the tradeoffs

of using the tuition and fees deduction instead.)

The need analysis formulas are heavily weighted toward income, so

reducing your adjusted gross income will also decrease your expected

family contribution and increase eligibility for need-based financial aid.

Even though your retirement plan contributions do not affect your

eligibility for need-based financial aid, you should continue

contributing to your retirement plans. Contribute at least enough to

maximize the employer match, if any, as that represents free money.

What are my options are for receiving hardship support to assist in

paying for my daughter’s college education? My son was diagnosed with

cancer in 2005. Since then the medical bills have drained my savings.

Even though I make a decent living, finances are tight. In February my

son’s cancer returned requiring very aggressive chemotherapy and

medical care. My daughter has received scholarship money but it is not

enough. My income as reported on the FAFSA does not reflect my

expenses or situation.

— Martin S.

Ask the college for a professional judgment review. Some colleges call

it a special circumstances review or financial aid appeal. The college

will want documentation of your son’s situation. A letter from his

doctor and copies of one year’s worth of unreimbursed medical bills

should be sufficient. If the college financial aid administrator

determines that your situation merits an adjustment, she will reduce your

income on the FAFSA by the amount of your unreimbursed medical

expenses. (The amount of the reduction may be slightly less, to the

extent that medical expenses are already considered by the income

protection allowance in the need analysis formula.) This will decrease

the expected family contribution and increase the amount of financial aid.

There are also several scholarships available for siblings of children

who have had cancer. You can find a list of such

cancer scholarships

on the FinAid site at finaid.org/cancer.

Tell the dean of student affairs at the college about your family’s

situation. The dean can alert the college’s counseling staff to pay

extra attention to your daughter, since she may be worried about her

brother’s health. A cancer diagnosis is stressful for the entire family.

Source: Fastweb

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