Rule Change Might Boost College Aid Amount for Some Families

Good news for families with college-aged kids: Pretax contributions to 401(k) plans and other similar accounts no longer count as income for families filling out the Free Application for Federal Student Aid, or FAFSA.

The U.S. Department of Education rule change should make it easier for families to qualify for federal aid to pay for a college education.

In fact, some families could save up to $10,000 on college costs annually, according to a report in the Wall Street Journal.

The new rules should also make it a bit easier for some parents to continue to save for retirement while still helping to fund their children’s education.

Previously, families filling out the FAFSA were asked to detail how much they contributed to work-sponsored retirement plans. That amount was then factored back into the parents’ total income.

The result was that families were expected to contribute more to funding college costs. Currently, the federal formula states that families should contribute a maximum of between 22% and 47% of their discretionary income to paying college costs.

Now, the new FAFSA — which will be available in December — will not include questions about untaxed payments to tax-deferred pension and retirement-savings plans.

According to the Wall Street Journal, the rule change likely will have the biggest impact on families who make around $100,000 a year.

That is because these families will now find it easier to fall beneath a key income threshold that allows them to qualify them for additional aid.

The WSJ also points out that the new rules only apply to the FAFSA. Some schools use alternatives to FAFSA, and it is possible that retirement contributions still will count as income in their formulas.

For more on cutting college costs, check out “10 Colleges Where Tuition Is Free.”