New FAFSA Formula Helps Parents Afford College and Save For Retirement
Paying for college and saving for retirement are two of the biggest financial challenges Americans face. But the good news is that the formula used by FAFSA— Free Application for Federal Student Aid—has changed beginning this month, December 2023. And change can’t come fast enough, as middle-income Americans cope with high inflation and high interest rates, stretching family budgets and making college difficult to afford.
So, what has the Department of Education changed in the FAFSA formula? One of the biggest things has to do with contributions made to traditional retirement accounts like 401(k)s. Pretax contributions made to retirement accounts will no longer count as income in the formula that measures a family’s ability to pay for college. In the past, retirement contributions were factored into total income, raising the amount families were expected to contribute.
The FAFSA formula change means some families could save between $5,000 to over $10,000 on the cost of college each year, depending on their income! In fact, under the new federal formula, the maximum families are expected to contribute to the cost of college is capped at a range between 22% to 47% of their discretionary income.
Chris Longworth, a certified financial education instructor at The Financial Education Group, an advisory firm in Washington state, advises his clients to create a plan that helps pay for both college and retirement, not one or the other. He says:
Parents who put college savings ahead of retirement savings may end up having to play catch up once their kids graduate from college. By that point, they are closer to retirement age and may end up having to save even more money each year to meet their goals, stay in the workforce longer or adhere to a stricter budget once they retire. They literally sacrifice their future lives for the benefit of their children.
For more information about what Chris Longworth recommends in terms of paying for college and saving for retirement, set up an appointment with him here: https://calendly.com/thefinancialeducationgroup
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