You may be vaguely aware that the cost of college continues to rise faster than inflation, but that doesn’t necessarily mean you’re prepared for a price shock when your kids start applying to school. Currently, the average cost of a single year of college is $38,270 per student per yearwhich includes the cost of books, supplies, and living expenses.
Unfortunately, college tuition costs It increases every year by about 4.1%.This means that a student starting their education at a cost of more than $38,000 in 2024 will likely pay nearly $45,000 for their final school year in 2028.
But just because college is unaffordable doesn’t mean your kids’ only option is to live in an off-grid yurt. There’s plenty you and your kids can do to protect your finances and save on education costs. Here’s what you need to know.
Understanding the FAFSA Student Aid Index
Completing the application for free federal student aid may seem daunting, but it is an important part of paying for college. The answers you and your student provide to the application for free federal student aid will help determine how much federal aid your student is eligible for, as well as the financial aid the school will provide to your child.
From the 2024-2025 school year onwards, your child’s level will be assessed. Eligibility for Federal Need-Based Assistance It is determined by the following equation:
Cost of Attendance (COA) – Student Aid Index (SAI) = Financial Need
For example, if your annual salary is $25,000 and your annual income is $5,000, your financial need is $20,000. This means that you will not be eligible for more than $20,000 in need-based financial aid.
The Student Aid Index replaces the Expected Family Contribution (EFC), although both measures are calculated based on the student’s and his or her parents’ income, assets, taxes, and demographic information. You can use This calculator is for estimating your child’s SAI..
Assets listed on the FAFSA
When you fill out the FAFSA form, you must include the following financial information about yourself and your student:
- Federal Income Tax Returns
- child support records
- Current checking and savings account balances
- Money in taxable investment accounts, brokerage accounts, money market accounts, and trust funds
- Real Estate Investments
- Funds in a 529 education savings account owned by a dependent student or his or her parents
In other words, the federal government requires you to include these specific assets in your student’s SAI account. The more assets on this list, the less need-based financial aid your student may qualify for.
including 529 plan
While the money is in 529 plan calculation Money in a SAI account does not mean you are harming yourself by allocating money to the account. While the value of a 529 account owned by a parent or dependent is counted as an asset on the FAFSA, the money in your 529 account will only reduce your student financial aid package by a maximum of 5.64% of the account value.
For example, let’s say you have $15,000 set aside in your child’s 529 account. Your child’s aid amount could be reduced by up to 5.64% of $15,000, or $846.
However, earnings in a 529 account or withdrawals from the account for education expenses are not included in the federal student financial aid application. This means that any growth in a 529 account or withdrawals for qualified expenses will have no impact on your child’s financial aid. This can often offset a 5.64% loss in the financial aid package.
But that’s not the only good news about your 529 plan. You can also exclude it entirely from your Federal Student Financial Aid Application (FAFSA) if you choose the right owner.
How to opt out of a 529 plan
If someone other than your dependent child’s parent owns a 529 plan, the value of the plan does not affect the student’s financial aid package. In other words, if your child’s grandparents, uncle, aunt, or other extended family member owns a 529 plan of which your child is a beneficiary, the FAFSA does not require you to include the 529 plan assets in its calculations.
In the past, assets in 529 accounts owned by grandparents (or not owned by parents) were similarly excluded from FAFSA calculations, but any distributions from those accounts would be considered non-taxable income to the student using the funds. This non-taxable income would affect the student’s financial aid.
However, starting in the 2024-25 school year, a grandparent-owned 529 will have no impact on your child’s eligibility for financial aid. Any distributions from a grandparent-owned (or non-parent-owned) 529 are treated the same as distributions from a parent-owned 529. They are not included as part of the student’s income.
If you already have a 529 account that names you or your dependent child as the owner, you can transfer ownership to your child’s grandparents or another relative. The specific requirements will vary depending on the state you live in and the brokerage firm that maintains your 529 account plan. Consult your 529 plan to determine what you need to do to transfer ownership.
Assets Excluded from the FAFSA Application
In addition to 529 accounts owned by grandparents, the FAFSA excludes several other specific assets from its calculation. Here are the excluded assets you are likely to own:
- Qualified retirement plan accounts, such as 401(k) plans, IRA plans, and Roth 401(k) or IRA plans
- Pre-tax contributions to qualified retirement plan accounts
- Your primary residence
- ABLE Accounts (for disability-related expenses)
- Life insurance value
The money you set aside for these assets doesn’t go into your student financial aid calculation. That means you can improve your financial situation and your child’s financial situation by maximizing these assets — in time.
Your base year assets
The Federal Student Financial Aid Application (FAFSA) uses your income and taxes during your student’s base year—the calendar year that begins on January 1 of your sophomore year of high school through December 31 of your junior year—as the starting point for calculating your student’s SAI. This base year may also be referred to as the “prior year.” For example, students starting college in the fall of 2024 have a base year of 2022.
Intelligent Asset Management During Base Year
Overall, these FAFSA rules about timing and asset inclusion make it clear that maximizing your retirement contributions during your child’s base year is the best use of your money. The pre-tax income you save in a 401(k) or traditional IRA, and the value of those accounts, will not be included on the FAFSA.
By maximizing your contributions, you’ll build your retirement savings, lower your taxable income and reportable income on your FAFSA, and increase your child’s chances of getting need-based financial aid. The more money you can afford to put into your retirement account during this all-important year, the better off you, your retirement savings, and your child will be.
Raising your kids without destroying your money
The ever-rising cost of higher education can be a slow-motion disaster, but that doesn’t mean you need to let it derail you. Once you understand how colleges calculate financial aid, you can take steps to protect your future and your child’s future.
Transferring ownership of your child’s 529 plan to a grandparent or other trusted family member (while keeping your child as a named beneficiary) can give your child a small boost in qualifying for need-based financial aid. But prioritizing your retirement contributions during your child’s high school years will give you an even bigger benefit. Not only will this reduce your taxable income and assets on the FAFSA, it will also help ensure your own secure retirement.
Source link
