In this post, I’ll be simulating various scenarios using my own personal projected early retirement finances to show how college financial aid estimates vary depending on specific choices.
I’ll assume you’ve already read Part 1 and are therefore familiar with the basic concepts/decisions.
Let’s dive into my finances and explore what happens when we plug my specific numbers into a college net cost calculator (such as this one from CSU).
Part 2 contents:
My projected net worth
Let’s start with the basics. FAFSA will utilize [1] tax return income from 2 years prior (your child’s sophomore spring / junior fall tax year), but will use [2] an asset snapshot about ~9 months prior to start of college (October of Senior year).
When my child files her FAFSA in 2027, I project a capital gains “income” of ~$20K and a networth of ~$2.4M using these two time windows counted on the FAFSA. With a paid off mortgage, my net worth will look like the below.
Is this the optimal setup to secure a sticker price reduction on college? What happens if I shift out of home equity or keep working?
Comparing 3 scenarios
I’ve run dozens and dozens of simulations (I’m kind of a spreadsheet nut), but for simplicity sake, let’s break down 3 unique scenarios to see how they are reported and their impact on aid eligibility.
The three scenarios are as follows:
- Scenarios 1 is the pie chart I first shared where I am early retired with no mortgage, and where I estimate $20K of capital gains will fund my living expenses.
- Scenario 2 shifts $300K of home equity into brokerage, but funding living expenses, including the mortgage, will push my capital gains income up to $30K.
- Scenario 3 is a bit of a wild hare I simulated just for a counterpoint, where I dump non-retirements to 0 but my family still works.
Compared side by side, the 3 scenarios may look like this to the school finance administrator or the automated tools that assess aid.
Keep in mind, these 3 scenarios are sort of a worst case scenario for what the early retiree will report. Most resources and schools will suggest that income lower than $27K (even if its from capital gains / dividends) can qualify you for the auto zero EFC where non-retirement assets aren’t reported at all. You may even similarly be able to exclude assets with below $50K income using the Simplified Means test.
Let’s just assume however that the state university considers everything listed in the graphic, and the full amounts listed under brokerage/bank bars are scored. What are the projected aid packages, if any, for the early retiree?
Estimated Aid
If you are already versed in the world of FIRE, you might assume that Scenario 3, where I am theoretically still employed, will yield the worst outcome.
And you’d be correct. Take a look below for the estimated aid for each scenario.
Low income all but guarantees a full Pell grant (Scenario 1), even churning out reduced benefits in Scenario 2, despite the sizable $570K brokerage. Expectedly, Scenario 3, with no assets and income only nets 0 financial aid. Even if my family dialed down to one income, no dice.
Just like taxes and ACA coverage, these aid projections demonstrate that the US college education system punishes earned income and privileges investment income. And just like the USA’s broken tax code, the FAFSA also privileges those who acquire knowledge and prepare ahead to legally obtain the best outcome.
My plan
I already planned scenario 1 (retire early, 0 mortgage, low living expenses) before I went down the rabbit hole of estimating college education funding. The truth is, I considered retiring once already due to burnout, and my current working days are already numbered, regardless of how I estimate college costs.
This exercise then just confirms that my targeted early retirement plan is best for my wallet . . . as well as for my mental health and happiness. So I will be preparing over the next couple years to execute this plan.
My early retirement plan projects that I can expect to see a ~$30K college bill reduced to about ~$10k if I retire early.
But what about risk?
You may have noticed an $80K problem: even with aid, each of my two kids are still $10K short per year. That’s a lot of coin. How can we tap this cash without raising income reportable on the FAFSA? Between 2 kids, that’s 5 reportable income years to FAFSA, where I will have to throttle my income to maintain aid.
A half decade is a long time. Can I really survive that long? What if my roof caves in? What if I get sued for something? What if a meteor crashes into Earth!?!? Argh, risk risk risk!
Believe it or not, with careful planning, my risk of over-inflating my income to help fund college is actually quite low.
First, I welcome the challenge to keep my initial retirement expenses low for 5 years (my plan is about a 2% withdrawal rate). Frugality got me here, and frugality, especially in early retirement, will mitigate the sequence of return of risks and ensure the longevity of my retirement.
Second, my kids will share some of this burden. I want my children invested, emotionally and financially, in their own education decisions. This $10K gap per child could largely be met by merit aid or work study jobs and Stafford loans (see part 1). Beyond that, ramen noodles served me well, and it will serve them too – plus, they actually do love ramen.
Third, what fun is FIRE without some secret money hacks? I have some dazzling tricks up my sleeve that I’ll share in Part 3 of this funding college series. For now, I’ll just stress that “income” as reported on tax returns (and 2 years later on the FAFSA application) is not the only source of cash flow I am planning.
Keep following this series on Part 3, where I will lay out specific money hacks I have planned that will give me access to more than $100K that is exempt from the FAFSA income radar.