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Retirees ponder tuition for kids

The Baltimore Sun

We marry and start families later than previous generations. Some of us will even launch a second family late in life.

The result is that more parents will be paying college tuition bills during retirement.

Paying for college while working is tough enough. Juggling tuition bills on a fixed income can be a more difficult feat. There's financial aid, of course. But will schools expect older parents to crack open a retirement nest egg to finance college?

That's the question on Larry's mind. The Timonium father is 65. His daughter is 17 and will graduate from high school in May 2009. By the time the teen enters college, Larry's wife also will be retired.

"Do we have to claim our retirement assets when applying to colleges? Home equity? Social Security?" he writes in a recent e-mail. "If so, the quality of our retirement years will be diminished after four or more years of tuition."

Good news for Larry and parents like him. The federal financial aid formula doesn't look at money parked in a 401(k), IRA or other qualified retirement plan. Income counts more than assets. And if your income is low enough, even assets outside retirement accounts won't be considered.

Money withdrawn from retirement accounts, though, will be considered income for aid purposes. But even here, retirees may be able to control withdrawals in a way that minimizes the impact on financial aid.

If your child is headed to campus in the fall, you will need to fill out the Free Application for Federal Student Aid if you want help with tuition. You can start filing the FAFSA today. Private colleges also may require that you fill out the CSS/Financial Aid PROFILE Application, which they use to distribute their grants and scholarships.

The FAFSA and PROFILE don't ask all the same questions. For brevity's sake, we will only discuss the federal aid formula.

As noted, money invested in 401(k)s, IRAs or other qualified retirement plans isn't counted. Neither is home equity.

Money in nonretirement accounts at a bank or brokerage, though, will be included in the family's assets. Even then, the formula excludes a certain amount. The older you are, the larger the amount excluded, says Kalman Chany, author of Paying for College Without Going Broke.

For a couple where one spouse is 65 or older, the amount of assets excluded is $75,200, he says. For a single parent that age, the exclusion is $29,300.

Assets count less than income in determining aid.

In fact, if your adjusted gross income is low enough - under $50,000 - the family's assets could be excluded from financial aid calculations altogether. For that to happen, you must be eligible to file a 1040A or 1040EZ tax return, or not required to file a tax return at all, Chany says.

If assets aren't being counted, you could have a couple of million dollars in a brokerage account and not have that affect your ability to receive federal grants or subsidized student loans, Chany says.

The formula is more generous if your adjusted income is $20,000 or less in 2007, or up to $30,000 in 2008, Chany says. Under this scenario, your family won't be expected to contribute money toward college.

Again, to qualify for this, you must be eligible to file one of those simplified tax returns or not required to file at all.

For retirees, income typically includes withdrawals from IRAs and 401(k)s and checks from pensions and annuities.

Social Security, for now, also is counted as income for federal aid. This includes benefits you receive and those you receive on behalf of your children, Chany says.

You may know that young children can receive benefits if a parent dies or has a disability. Not so widely known is that youngsters are entitled to Social Security based on a retired parent's work record. The amount depends on the number of children in the family.

If there's only one child, for instance, he or she can generally receive an amount that's up to half of a retired parent's benefit. Children can receive benefits up until age 18, or 19 if they're still in high school.

For aid purposes, your child's benefits will be considered as part of your income, Chany says. Beginning in the 2009-2010 academic year, all nontaxed Social Security benefits will no longer be considered in the aid formula, he says.

Retirees sometimes can control income, such as deciding when they take Social Security.

If at all possible, try to minimize your income by limiting withdrawals from retirement accounts, Chany says.

"You're better off spending down savings, CDs, cash and checking accounts rather than taking a distribution from retirement plans," he says. Money parked in nonretirement accounts is considered an asset, not income.

Besides, many financial planners recommend spending money in taxable accounts first in retirement to keep investments growing in tax-deferred accounts as long as possible, Chany notes.

After age 70 1/2 , you will be required to take distributions from traditional IRAs and 401(k)s. But again if possible, try to take the minimum distribution while a child is in college, Chany says.

Be aware, too, that if your income is going to change during the year - say, your spouse is going to retire later this year - you can ask the financial aid office for a professional judgment, says Mark Kantrowitz, publisher of, an online provider of aid information. This allows the aid officer to factor in that your family income will be falling, and possibly lead to a larger aid package.

Questions? Comments? Want to share your own financial tips with readers? Contact Eileen Ambrose at 410-332-6984 or by e-mail at

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