<b>My wife and I make about $150,000 in combined income. We have
probably $350,000 in home equity, $100,000 in rental property equity
and $500,000 in retirement accounts. We have three kids in college and a
fourth starting in the fall a year from now. We hope to quit our jobs
at some point and move to Nicaragua (or another Central American
country) so my wife can teach English and I can do service work
there. My wife will make under $20,000 and I will probably make
nothing. As I understand it today, we don't qualify for any financial
aid (except loans) due to our income. We have about
$80,000 in 529 money which we hope will get everyone through one or
two years of college, but are hoping our reduced incomes will allow
them to qualify for free grant money once we 'drop out'. We have not
submitted a FAFSA yet because we don't want any record of our current
income to show up later when the kids apply for grants.
How low do our incomes need to be to get free grant money?
What is the best timing for us to quit our jobs?
Is there any harm submitting a FAFSA now, and having a record of
our high incomes, or do they ONLY look at the past year?
— Randy B.
If a family's primary reason for "dropping out" is to help others,
that is commendable.
But the grants are not always greener on the low-income side of the fence.
Low-income students do tend to qualify for more need-based grants. But
slashing income to help the children qualify for more financial aid
usually does not yield enough additional grant aid to compensate for
the lost income. Many colleges do not meet the full demonstrated
financial need of their students, leaving a gap. Financial aid
packages also include loans, not just grants. Financially, $150,000 in
income yields more money after taxes to pay for college than the
$5,000 to $10,000 in average grants per child received by a family
with $20,000 to $25,000 in annual income. Some colleges provide more
grants, but these colleges are also more selective.
There is no specific income cutoff on eligibility for need-based
grants. Instead, eligibility is based on financial need, which is the
difference between the cost of attendance (COA) and the expected
family contribution (EFC). Financial need increases with increases in
COA or decreases in the EFC. But financial need is usually met with a
mix of loans and grants, not just grants. Expensive private non-profit
colleges typically award most students grants that cover one third to
half of the cost of attendance, but that still leaves the student and
parents with tens of thousands of dollars to be paid with savings,
income and loans.
(The Pell Grant is based only on the expected family contribution. As
discussed in
Ask Kantro: How Much Income is Too Much When Applying for Need-Based Aid?,
most Pell Grant recipients have family income under $50,000.
To qualify for a full Pell Grant, the student must have a zero
EFC. The income threshold for an automatic zero EFC will be $23,000 in
2012-13.)
One can play what-if games with a college's net price calculator to
explore the impact of an income reduction on the net price. The net
price calculator provides a ballpark estimate of the remaining costs
after subtracting grants. All colleges have been required to provide a
net price calculator on their web sites since October 29, 2011.
One could also use the
College Navigator tool
created by the National Center for Education Statistics (NCES) at the
US Department of Education. This tool includes tables that show the
average estimated net price for various income thresholds at each
college.
In-state public colleges and the six dozen colleges with generous no loans financial aid
policies tend to have the lowest net price for low-income students.
To affect eligibility for need-based financial aid during the freshman
year of college, an income reduction would have to occur at least one
calendar year prior to enrollment. For example, the FAFSA is based on
the prior tax year's income, so income would have to decrease the year
before the FAFSA is filed to have an impact on that year's expected
family contribution. Since each FAFSA controls only one year of
eligibility for financial aid, the income reduction would have to
continue through the end of the tax year prior to the start of the
student's senior year in college.
The FAFSA and most financial aid application forms look only at the
prior year's income when evaluating eligibility for need-based
financial aid during the subsequent award year. The main exception is
when a family seeks a professional judgment review to appeal for more
financial aid because of volatile income (i.e., the income during the
prior tax year was unusually high, not reflective of ability to pay
during the award year). If the family's income varies considerably
from one year to the next due to the nature of the wage-earner's
employment, some colleges will use an average of the last 3-5 year's
income to smooth out the volatility.
The EFC is also based on the family's assets, not just income. The
FAFSA will ignore all assets for a family that qualifies for the
simplified needs test. (Likewise for a family that qualifies for
auto-zero EFC.) Typically a family must have less than $50,000 in
annual income and be eligible to file an IRS Form 1040A or 1040EZ to qualify
for the simplified needs test. There are other criteria that can
substitute for the income tax return requirement. Even if the family
doesn't qualify for the simplified needs test, money in qualified
retirement plans and the net worth of the family's principal place of
residence are ignored, as is about $40,000 to $50,000 in other parent
assets.
The CSS Financial Aid PROFILE form, however, is used by about 250
colleges to award their own financial aid funds. This form does not
have a simplified needs test and may consider the net worth of the
family home and excessive retirement assets. A family with low income
but significant assets might not qualify for institutional grants at
some of the more expensive colleges.
Should Wealthy Parents Cut Family Income Tenfold to Help their Children Qualify for Need-Based Student Financial Aid?
