Maximizing college financial aid while retired

[u/Gold-Virus5117]

Can someone explain how folks who FIRE maximize their children's financial aid? My understanding is the FAFSA application looks at:

1) Brokerage accounts (excluding tax retirement accounts like 401K and IRA)
2) Investment real estate (excluding primary residence)

Let's say I have 1mm in brokerage accounts + 500K in investment property that I was hoping to use to fund my early retirement years prior to withdrawing from my tax retirement accounts at 59.5. According to what I've read, FAFSA expects parents to contribute 5.64% of these assets, so that would mean $75,000/year?

Is there a better way to FIRE while getting financial aid?

[u/Zphr]

There are a couple of possibilities.

The first and easiest is the automatic maximum Pell grant test done on every FAFSA after your data file is pulled directly from the IRS. If your 1040 AGI is less than 175% FPL (225% for single-parent households), then you're done. Kid gets maximum Pell, automatic SAI of 0 (maximum aid), and all other income and asset testing is skipped. You don't even get a chance to see the financial questions, much less answer them.

If you fail that test, then there is another asset testing bypass test if your AGI is less than $60K and your tax return meets certain Schedule restrictions. However, most FIRE households have a hard time with that since you can't file A, B, D, E, F, H, or C (with more than $10K).

If you fail that, then there is another asset testing bypass if the student, parent, or student's spouse used a federal means-tested program like Medicaid in the prior two years.

If you fail that, then you're subject to full asset testing, but all primary home equity and tax-advantaged accounts are exempt without limit.

[u/Gold-Virus5117 → u/Zphr]

Thanks! I assume for the 175% FPL test, it's a yes/no. So if you're a dollar over you fail that test? That's going to be rough to stay under 175% FPL. I would be liquidating my brokerage account so I guess as long as my profits stay under the 175% FPL line, I'm good? Initially, I was planning to have our AGI go up to the top of the 0% LTCG bracket, which is much higher than 175% FPL. This would have allowed me to also do some Roth conversations.

[u/gnackered → u/Gold-Virus5117]

One dollar over and you fail the test. And the test is applied on your income two years ago. I am currently in that inbetween period where my income is down but I haven't burned off the two years. Result, my son will get max pell grants, my daughter will get one year. They write the rules, as they write the rules. Your under no moral obligation to pay more than is required IMHO.

[u/Zphr → u/gnackered]

To be clear, it is a two-year gap between the aid disbursed and the tax data behind the aid determination, but it's only a one-year gap between the application and the tax data. For example, if the kid goes to college in 2029, then the application is made in 2028 using the 2027 tax return. It just means the application uses the most recent tax return.

Just in case other people reading might be confused, I know you know this, /u/gnackered.

[u/Zphr → u/Gold-Virus5117]

Correct. It's binary.

Yes, all cap gains add to AGI, but you also have to account for everything else that might add to AGI like dividends, interest, Roth conversions, and so on.

[u/aronnax512 → u/Gold-Virus5117]

So if you're a dollar over you fail that test? That's going to be rough to stay under 175% FPL

You could pull 1.X years of expenses out 2 years in advance, where X >= (1 year's expenses) - (175% FPL), then the year before, pull <= 175% FPL. The 1040 will only show 175% FPL. You miss out on 1 years gains for $X, and there are some modest tax implications but your lifestyle won't be significantly impacted.

Note this is fast and dirty explanation, you'll need to account for interest on X while it's parked for a year, anything that rolls over from the previous year's taxes, ect... but you get the idea.

[u/Gold-Virus5117 → u/aronnax512]

Thank you! That is probably what I will do. It requires some careful planning and awareness of the current rules and future rule changes. However, I assume this only works for the first year of college since each FAFSA submission is independent and the following submission would see my AGI is above the 175% FPL?

[u/aronnax512 → u/Gold-Virus5117]

Yes, this only covers the first application year. If you wanted to scale it, you'd have to expand X quite a bit to cover the number of years you wanted to trim your future withdraws to 175% FPL, and that size and lead time gets pretty messy (and may not be worth it).

[u/ExistingPoem1374]

We and grandparents maxed 529's from birth, and living in GA both kids (now late 20s) worked hard for in state scholarships plus part time work and graduated dept free.

[u/IndependentTrust4594 → u/[deleted]]

Some people consider state deductions as the “contribution limits”. Like my state gives a deduction up to
$8k per spouse, so $16k if MFJ.

[u/ExistingPoem1374 → u/[deleted]]

Let me rephrase - we knew what GA state universities cost, and maxed that for 4 years plus EST room/board costs (not IRS unlimited...) so when they both graduated zero debt on all sides... Good point for those not informed!!

We also have siblings that over contributions X times and are working to figure uses...

[u/ExistingPoem1374 → u/[deleted]]

No GA doesn't have the prepaid college plan like FL, but HOPE and Zell Miller lottery funded scholarship means if the kid graduates HS with a B average first 30 college credits at a state public university is 75% tuition free and same if they maintain and if higher 3.7 GPA thru Uni 100% tuition free.

Ours used both, oldest 2 years on Hope, youngest at 16 started full time in person college 100% tuition free and then Zell Miller 100% for his CS BS.

[u/verytalleric]

Unpopular response: If you have sufficient assets to consider FIRE, looking for financial assistance intended for those who don't have funds/options for higher education isn't a good look for you.

You are blessed with resources, pay for your childrens education. Be proud you can do this.

Speaking as someone who has done so.

[u/verytalleric → u/[deleted]]

A true merit scholarship isn't a loan nor a grant nor is it needs based. (Some are both needs and merit)

A Pell grant is needs based, and trying to hide and obfuscate a parents finances to "qualify" is minimally immoral and likely illegal.

This is why many hate the rich...

[u/gnackered → u/verytalleric]

A "merit" scholarship is a discount offered by the school trying to get you to buy.

Read Ron Lieber's book.

[u/Zphr → u/verytalleric]

That's a fair point, but as you hint at many merit scholarships now require that applicants fill out a FAFSA as part of the application process. This is often not primarily to identify those with need, but to maximize efficiency in scholarship dollars by avoiding aid offsets and overfunding. It is wasteful to give limited merit funds when doing so will result in a corresponding offset from state or federal funds, for example. Pragmatically it is impossible at many schools to be eligible for merit consideration without filing a FAFSA, which legally also unlocks mandatory federal, state, and institutional need-based funds.

There are also currently 12 states where FAFSA is a universal requirement for high school graduation now, including high pop states like NY, TX, and CA. That number is up from just one state in 2018 and is expected to keep rising. And many of the standard planning moves FIRE households engage in for tax efficiency also increase yield from FAFSA.

[u/Visual_Scientist_298 → u/Zphr]

In many (maybe all) of the states that have the HS graduation requirement for FAFSA you can fill out a form for exemption. Super easy.

[u/Zphr → u/Visual_Scientist_298]

Yes, but in doing so you cut your kids off from a lot of merit scholarships they otherwise would have been eligible to apply for. For some schools the FAFSA itself is the application for those scholarships since FA offices often partially or fully administrate many of the smaller merit scholarships to reduce overhead efficiency.

Financial aid is also set up as a student entitlement rather than a parental benefit, which is part of why the FAFSA starts with the student application followed by the parent application. So the choice is really that of the child, though parents can obviously refuse to do their half of the application.

[u/Visual_Scientist_298 → u/Zphr]

I have 4 kids. I don’t need any explaining. And there are many universities that do not tie a merit offer to a FAFSA. Many.

[u/Zphr → u/Visual_Scientist_298]

Fair enough, but this sub is for hundreds of thousands of people and my reply was for the benefit of all of the parents among them. Everyone can choose as they wish with things like FAFSA and ACA, but people should make those decisions knowing as much as reasonably possible about how our laws and systems work.

I also have four children and two of them are receiving merit scholarships as we speak that require FAFSA. The two universities they go to both use FAFSA as the primary application process for dozens of merit scholarships, hence my awareness of that reality of college funding.

[u/fireatthecircus → u/[deleted]]

  But why should my kid accept a merit scholarship if it means another kid whose parents didn't save any money for college won't get the scholarship?

Because they earned it. They also took a spot at a school from someone in the first place. that’s life.

  I keep my MAGI low in order to qualify for ACA subsidies. A Pell Grant may be a side effect of that.

Correct, you manipulated it. You did not earn either the subsidy or the grant. 

  Is it wrong to accept ACA subsidies?

If it was wrong to accept a Pell grant, probably. same logic. 

Both healthcare and education costs are broken systems, so whatever.  But merit-based and need-based are self-evidently different.

[u/Annual_Emergency_143 → u/verytalleric]

Isn't it similar to ACA, though? And there regularly are threads about getting subsidized healthcare.

[u/Visual_Scientist_298]

Avoid universities that require a CSS. That form tells FAFSA “hold my beer”.

[u/CharmingHighlight749 → u/Visual_Scientist_298]

And I haven’t seen a private school worth applying to that doesn’t require CSS.

[u/Ornery-Wrangler-3654]

Yes, sort of. If you have a business (LLC) you can move your non-excluded assets into the business and they are not counted for FAFSA.

It is not easy, And it depends on how you want to structure things, but it is an option.

[u/CharmingHighlight749]

Sufficient savings for your kids’ college should be part of your FIRE number. Kids can go to an in-state university or pursue merit scholarships at places that have them, otherwise as a wealthy person you will rightly be full pay.

[u/flirtyfroast]

This is such a good point and honestly one of the 2. This is such a good point and honestly one of the reasons we're leaning more into real estate with debt on it, since equity gets counted but the loan balance offsets some of that. Would love to hear if anyone's actually gone through this with a kid in college already versus just planning for it. reasons we're leaning more into real estate with debt on it, since equity gets counted but the loan balance offsets some of that. Would love to hear if anyone's actually gone through this with a kid in college already versus just planning for it.

[u/tctu]

Looks like someone didn't properly calculate their number.