I think it’s easier to understand the expected family contribution for college expenses that is determined by FAFSA if it is viewed as a tax on assets and income.
I’m trying to estimate our parent contribution for next year. The expected family contribution is the total of the expected parent and expected student contributions. The formula for FAFSA is available at ifp.fed.gov.
FAFSA first calculates income. Our taxable income (before standard deduction and exemptions) is about $103,000 for 2015. Our untaxed income will include $12,000 that we took out of a Roth IRA. We had planned to use the money to move, but changed our minds. We tentatively plan to contribute $6,500 to a traditional IRA, which will reduce our taxable income, but count as untaxed income. Our total taxed and untaxed income is $115,000.
FAFSA then calculates allowances against income. Our allowances are:
- Income tax: tentatively $7,156
- State and other taxes: $1,150
- Social Security and Medicare taxes: $4,898
- Income protection allowance: $22,220
- Employment expense allowance: $4,000
Total allowances: $39,424
FAFSA then calculates available income by taking total income minus total allowances. In our case, $115,000-$39,424=$75,556 available income.
Contribution from assets is then added to arrive at adjusted available income. Our contribution from assets is tentatively zero, since our asset allowance based on my wife’s age (she’s older) is $24,300 and we plan to have less than that in assets. House and retirement funds aren’t counted as assets. Twelve percent of assets over the threshold count toward adjusted available income. We had planned to put money into IRAs to decrease our assets under the threshold.
Our parent contribution is $8,706 plus 47% of adjusted available income above $32,200. For us that is $75,556-$32,200=$43,356 x .47=$20,377. $20,377 plus $8,706 is $29,083. That is almost $12,000 above what it was this year. It went up because of the IRA withdrawal,losing our older daughter as a dependent, and paying less in Social Security and Medicare. This problem is compounded because the government plans to use 2015 taxes for the next two years for calculating financial need. Our daughter’s student contribution will be zero because she will earn less than $6,400 and has virtually no assets.
I have contacted the financial aid department at our daughter’s school. They said to write to them once FAFSA was submitted. This change in family contribution won’t affect our daughter’s scholarships, because they are all academically based. It could reduce her available loans. She did use her subsidized loans this year, but not her unsubsidized ones.
I want to look at the question of whether we should contribute to a traditional IRA for 2015. It would reduce our income tax but also affect our family contribution. Putting money in a traditional IRA would reduce our income tax by 25 cents per dollar. It would also reduce our FAFSA contribution by 12 cents per dollar by reducing our assets. However, every dollar it reduces our income tax would increase our family contribution by 47 cents. That means if we put $3,000 a traditional IRA for 2015, it would decrease our taxes by $750 and decrease our family contribution by $360, due to a drop in assets. At the same time it would increase our family contribution by $353 due to the decrease in taxes, so it would reduce family contribution by a net of $7.
Our family contribution should fall steeply for 2018-2019, with our income falling in 2016. Our total income should be $72,303. Our income taxes, based on 2016 rates, would be $3,736. Our tax allowance would be $723. Our income allowance would be $22,220, assuming it doesn’t change. Taking income minus allowances, our available income would be $45,624. Our family contribution would then be ($45,624-$32,300) x . 47 + $8,706=$14,968. This is only a couple thousand less than it is currently. It probably won’t help us any because if they increase our daughter’s financial aid, it could just be through loans. We promised our daughter that she wouldn’t have to take out more loans because of our retirement.