FAFSA and Non-trad students

[orangeblue]

Guys,

If you have worked for a few years and saved ..let's say over 50k,..
FAFSA asks you to list your assets. Is it better to put this in Roth IRA, or other accounts that FAFSA doesn't count instead of cold hard cash, because then your EFC goes up and you may not get as many loans / grants for medical school.

Or bc we dont get subsidized loans anyways for medical school, it wouldn't make a big difference? However Stafford non subsidized loans seems like a better option than other private loans>..

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[libahli]

So here's the deal. Whether or not you have to even report any assets depends on two things:
#1. your income for the FAFSA year (note, this is not current year income - the current FAFSA for the 2017-2018 tax year actually uses 2015 income information) - If you earn below a certain threshold (<$50k) AND
#2. you filed a 1040A or 1040EZ tax return
then you would qualify for the simplified method. If you qualify, you literally don't report any asset info on the FAFSA itself (whether or not your school will still require your asset info is school dependent)

Assuming you don't qualify for the simplified method, FAFSA does not actually include any retirement accounts as part of your assets. So if you put your money into a retirement account, that money will not be counted toward your EFC. **However, do note that if you are contributing to an IRA or 401k that lowers the income you're reporting on your tax return, FAFSA will add that back when calculating your income. It can be confusing because while the assets themselves won't count, if you get a tax benefit in making the contribution, that will count as income.

The whole thing is rather confusing and it took me a while to completely wrap my head around it. The best source of information is here:
https://studentaid.ed.gov/sa/sites/default/files/2017-18-efc-formula.pdf

You'll want to look at the 5th and 23rd pages - these were the two pages I found most relevant.

I think you should aim to get your FAFSA EFC as low as legitimately possible because you never know what type of aid money you can get depending on your EFC criteria. At one school I interviewed at, they mentioned that all students with an EFC less than a certain amount would get a guaranteed grant each year of I think $8k. So it's definitely worth your while to learn about will/won't count for your EFC and whether or not you think you would qualify for any aid that uses your EFC as the main criteria.

Last caveat - you might not want to tie up all your assets by putting them in retirement. You can still leave some as an emergency fund and not have it add too much to your EFC. You can google EFC calculators and play around with the numbers and you'll see what I mean.

 

[Froggy25]

Just to vent about FASFA as a non-trad a little bit: I find it unfair that our two-years-back income is counted for medical school grant/scholarship prospects. We're going to be earning $0 while attending medical school and, as independent adults, we generally lack other funding streams, such as parents. This gets doubly worse when you have your own kids, as you're not only losing your own income, but the method of supporting your children too. Just seems like it's a little out of the "spirit of the law" when it comes to the general concept of scholastic financial aid.

 

[CyrilFiggis]

The government has to provide you with a package that will cover all the costs of school. Having $50k in savings is not enough to create a high out of pocket cost for you. My wife and I had a six-figure MAGI when I started as still received an aid package for the full tuition and COL.... I obviously didn't receive any need-based institutional aid, but I knew that going in.

Also, don't put it all into an IRA because then you can't spend any of it without penalty in case of emergency. I'd rather take that money and put it in:

IRA - $10K
Savings/Emergency/ Vacation - $20K (CapOne MoneyMarket)
Large Cap Index Fund - $20K

That way you're making a long-term investment, saving some for rainy days and fun, as well as letting your money work for you.

 

[libahli]

Also, don't put it all into an IRA because then you can't spend any of it without penalty in case of emergency. I'd rather take that money and put it in:

IRA - $10K
Savings/Emergency/ Vacation - $20K (CapOne MoneyMarket)
Large Cap Index Fund - $20K

That way you're making a long-term investment, saving some for rainy days and fun, as well as letting your money work for you.

Incorrect. OP can withdraw penalty-free from an IRA as long as he/she is using it for qualified educational expenses. The actual dollars don't have to be used (aka they could also take out loans and use that money to pay the actual tuition) but they would just needs to show that they incurred those expenses in the same calendar year.

Now, if it was a deductible IRA m, they would run into having to pay actual tax (not penalties, but actual income tax) on the distributions. Likely they wouldn't be paying much tax if that's their only "income" (and they could also see if they can qualify for an education tax credit) but that's something to be aware of.

Also, there's no way they could contribute $10k in one calendar year to the IRA - the limit is $5.5k per year per person.

 

[wysdoc]

Guys,

If you have worked for a few years and saved ..let's say over 50k,..
FAFSA asks you to list your assets. Is it better to put this in Roth IRA, or other accounts that FAFSA doesn't count instead of cold hard cash, because then your EFC goes up and you may not get as many loans / grants for medical school.

Or bc we dont get subsidized loans anyways for medical school, it wouldn't make a big difference? However Stafford non subsidized loans seems like a better option than other private loans>..

How about using that money to pay your tuition instead? No interest payments and no debt! When you have paid a year or two your cash reserves will be down enough that you will be eligible for loans then. FAFSA should be turned in every year that you want to apply for aid.

 

[orangeblue]

How about using that money to pay your tuition instead? No interest payments and no debt! When you have paid a year or two your cash reserves will be down enough that you will be eligible for loans then. FAFSA should be turned in every year that you want to apply for aid.

There is a chance that I would like to work in a rural area with loans already paid by the government in exchange for service. No 100% sure but there is a chance. That's why I didn't want to pay upfront...How much interest are we approximately talking about on 20K of tution ? So if I borrow 20k in 2017.... in 2021, how much will that be approximately?

 

[wysdoc]

There is a chance that I would like to work in a rural area with loans already paid by the government in exchange for service. No 100% sure but there is a chance. That's why I didn't want to pay upfront...How much interest are we approximately talking about on 20K of tution ? So if I borrow 20k in 2017.... in 2021, how much will that be approximately?

Loan calculator here: FinAid | Calculators | Loan Calculator

 

[CyrilFiggis]

Incorrect. OP can withdraw penalty-free from an IRA as long as he/she is using it for qualified educational expenses. The actual dollars don't have to be used (aka they could also take out loans and use that money to pay the actual tuition) but they would just needs to show that they incurred those expenses in the same calendar year.

But I didn't say educational expenses, I said emergencies. OPs tuition would be covered by his loans, but if he needed a last minute flight to go home, auto repairs, rent, etc, those aren't qualified and he would pay penalty.

 

[libahli]

But I didn't say educational expenses, I said emergencies. OPs tuition would be covered by his loans, but if he needed a last minute flight to go home, auto repairs, rent, etc, those aren't qualified and he would pay penalty.

Nope, not true. He can have loans that actually pay for his tuition and still withdraw from his IRA penalty-free up to the amount of his qualified educational expenses even though the actual money withdrawn won't be used to pay for those expenses.

It's confusing but basically you just have to show you have the educational expense that same calendar year that you withdraw from the IRA. You can use that money for other things, those exact dollars don't have to be what actually goes to the school. Therefore if you have emergency expenses, you can use your IRA fund to pay for those expenses but only up to the amount of your qualified educational expenses for the year.

Caveat - this assumes that you're not receiving grants/scholarships because those would reduce your qualified educational expenses. Loans do not, nor do gifts/inheritances/etc.

See Publication 970 (2016), Tax Benefits for Education



Specifically:

"Don't reduce the qualified education expenses by amounts paid with funds the student receives as:

Payment for services, such as wages;

A loan;

A gift;

An inheritance given to either the student or the individual making the withdrawal; or

A withdrawal from personal savings (including savings from a qualified tuition program (QTP)).

If your IRA distribution is equal to or less than your adjusted qualified education expenses, you aren't subject to the 10% additional tax."