Part 1 and Part 2 covered the basics and simulated financial aid at various income/brokerage/mortgage levels. Here in Part 3, I will show you exactly how to access cash for living expenses and college funding while still hacking aid based on the early retiree’s low income.
As before, this methodology will assume (1) you plan to retire before the first tax year counted on the FAFSA, (2) will have zero debt and low living expenses, and (3) will also have a sizable brokerage account.
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The cash flow window
If you are a neophyte to this topic, you might be anticipating cash flow constraints for 4 years while your kid is in college. You are in for a pleasant surprise. Your window is actually a much more manageable 1 ½ year window! How?
It’s because the FAFSA uses “year prior prior” tax returns. This means if you stop working by January 1 of your child’s sophomore year, you will not have to even touch your wallet for college expenses until 2 years and 9 months later when your child starts as a college freshman, leaving you with just 3 semesters to fund (the cash flow window).
I’ll provide a chart below to illustrate. To break it down: the color coded cells show the large span of time between the income tax year used by the FAFSA vs the actual year of college attendance. So in the example below, all in orange are (1) college freshman year 2028/2029, (2) FAFSA filing and asset snapshot date of October 2027, and (3) income tax year 2026. Ditto for the other 3 college years in different colors.
You will see that in 2028, an incoming college Freshman’s aid is based on a FAFSA filed in late 2027 using a 2026 income tax return. Now 2 and 1/2 years retired with a college freshman in 2028, the cash flow window begins, where your income/funding of college could potentially impact aid for the just the next semesters 3 only.
During this window, you’ll then have to fund your own living expenses as well as college for just 3 semesters (freshman fall/spring and sophomore fall). After that, once your child is in their sophomore spring semester, you can take as much income / capital gains as you want, and it will have 0 impact on your child’s aid for their junior and senior years.
But how do you access more cash during that 3 semester cash flow window without impacting aid? You can easily hack more than $100K that is exempt from the FAFSA if you carefully prepare.
But before we dive into key preparation steps, let’s take a moment to sum up and make sure we have our numbers nailed down with precision. We know state universities cost ~$30K a year (Part 1), which reduces to ~$10K with the early retiree’s low income (Part 2). We also learned here in Part 3 that our targeted cash flow window is just 1 ½ years per child, which means funding $15K across 3 semesters.
Since I have two kids who are going to be in college simultaneously for 3 years, I have 5 total consecutive years of college education to fund. This pushes my cashflow window to 2 ½ years where I will need income-exempt cash reserves, leaving me with $40K to fund during my low income early retirement years. Your family’s figure may be higher.
Either way, I am next to going to show you how tap $100K or more, all income-exempt from the FAFSA during this constrained cash flow period.
How to Prepare
In order to setup this $100K war chest, you will need to take a number of actions before you retire. Most of this can be done in say December of the year before your first FAFSA compliant tax year. However, you may want to spread this burden over several years.
1) Exhaust major expenses.
Make sure every (and I really mean every) major expense is exhausted while you are working. Make sure to do the following: pay off house and all debt, replace beater car, fix your house, take the international vacation now, schedule elective surgeries now, pre buy school lunches for the remaining high school years – you get the picture.
If you will you need it in the next few years or it’s at risk of breaking down, pay for it now.
Value: Variable.
2) HSA Receipts
Go back as far as you can to keep a record of major medical/dental/vision expenses and know this number of what you paid out of pocket for since you created your HSA. This is going to create an emergency fund, as you can submit for reimbursement whenever you want, and the funds are exempt from both taxes and the FAFSA.
Think of the HSA like mattress cash, only better as it will grow with the stock market until you tap it.
Value: ~$20K between braces, wisdom teeth, etc..
3) Stockpile credit card points
You’re a good FIRE student and harvest $1000 or more a year, per parent, in credit card points and sign up bonuses, right? Sweet. Now hold onto those points instead of spending them.
Once retired, you can spend them on vacation, statement credit, or even gift cards for groceries. Either way, it’s all income free, FAFSA-exempt money.
Value: $5K
4) Major Money Moves
Here is where the rubber meets the road. We are going to move some major money around before we retire. These moves will create an additional $85K in tappable income-exempt funds.
This war chest is primarily earmarked for the 1 ½ year cash flow window, but you can tap for emergencies in any given year, to reduce the need for capital gains income that disqualify you from aid.
You can play with these figures to suit your own needs, but the principles will remain the same.
- Revise W-4: withhold an additional $10K in your last work year. This will be both (1) a buffer for capital gains taxes potentially incurred in the next 2 steps and (2) a nice refund in April that doesn’t count as income.
- Fund one year of expenses in cash: Save in your last year or sell enough brokerage and move the funds into a money market, high yield bank, or even some physical cash. It doesn’t really matter which you choose. Now you only have to fund 3 years of living expenses counted by the FAFSA. For me, this will be ~$35K.
- Fund 529 with $40K: If you haven’t been saving for junior’s college, don’t fret. You can just supercharge it right before you retire by transferring from your brokerage. This may even give you a state income tax reduction.
Putting it all together
That’s a lot of planning and a lot of information to take in. If you are late in the game, or already into the FAFSA window, you might be a little freaked out right now. Hopefully, like me you still have time to plan and prepare.
So let’s recap. So far we have checked all of the following boxes:
Steps | Value |
1. Estimate living expenses | $35K |
2. Estimate college cost | $30K |
3. Asset allocation to tap aid | $25K Income / $280K Assets |
4. Expected Aid | $20K |
5. Student contribution | $10K (Work Study/Stafford) |
6. Cash constrained window | 2.5 Years (2 Kids / $40K) |
7. Pre-retirement prep steps | $110K |
Drawdown Order
If you’ve done all the above, you’re as ready as you’ll ever be. Once you enter the cash flow window and need to tap FAFSA-exempt funds, you will want to be strategic about what funds you tap first.
First, you should tap student FAFSA exempt funds (even if you later pay off your child’s Stafford loan). This should be tapped in full before the early retired parent even touches the $110K war chest.
Once you break open the parent piggy bank, you will want to exhaust 529s first, since leftover funds have tax liabilities after college. HSAs are best left in the market to grow and used for future healthcare expenses, so should come last.
Below is my recommended order of withdrawal, with the highest priority first:
Priority | Value | Source |
1. Work Study | $5K | Student |
2. Staff. Loan | $5K | Student |
3. 529 | $40K | Parent |
4. CC points | $5K | Parent |
5. Tax refund | $10K | Parent |
6. 1 Yr cash | $35K | Parent |
7. HSA | $20K | Parent |
Even if your circumstances change (or tax/FAFSA laws change), the above list of funds should easily be able to fund the 1 ½ year cash window, where your income is low and you must fund college.
In fact, if you are debt free, frugal, and proactive like me, this will likely be far more funds than you need to help your child fund a 4 year state university education. These funds then can serve as a backup for your own living expenses, just as much as they can be for funding college.
So there you have it. College costs aren’t so scary . . . if you retire early. You don’t have to become an indentured servant, chained to a desk for 4 years, funding outlandish college costs and still falling short. You can secure college aid with a low income retired lifestyle.
And if you follow this guide and prepare in advance, you can build a $100K war chest of funds that your family can fall back on to help pay for your child’s college education, without sacrificing financial aid . . . or the hard-earned early retirement you earned.
To close out the Secret Life of FI “Funding College” series, read Part 4, where I examine the moral question of gaming the college aid system.