This will likely only be of practical relevance to a handful of members, either now or in the future, but may be of interest to others from a curiosity standpoint.

Also, others might have some insights that might help me out, either right now or in the next few years.

Our daughter (who just turned eighteen -- an event that I am still coming to terms with emotionally as I will forever miss the wonderful little girl she used to be, but I am insanely proud of the amazing young woman she has become) is a senior in high school and starting the college applications process. Part of that, for us here in the U.S.A. is filling out the FAFSA -- Free Application for Federal Student Aid. It appears that I managed to run us right into a buzz saw by trying to do the smart thing. After leaving the Academy a couple of years ago, my income went down considerably (like, by a factor of four). That opened up the opportunity to convert part of our Traditional IRA accounts over to Roth IRAs and pay the lower tax rate now. Hence, I converted enough funds to take us right up against the next tax bracket. In order to account for the additional taxes that have to be paid, the converted amount is added to your income for tax purposes. That's fine. But, it is added to your AGI (Adjusted Gross Income), and not to your Taxable Income (which would make a lot more sense).

Now, keep in mind that this does NOT represent any actual income. These are funds that were tied up in one type of retirement account and were transferred to another type of retirement account. In fact, the conversion reduced available income because of the taxes that had to be paid, totaling nearly ten thousand dollars.

However, the FAFSA uses the AGI as the starting point for determining eligibility for financial aid, so converted retirement accounts are considered indistinguishable from wages and other income. They further add back in whatever deductible contributions you made to retirement accounts that year. So, leaving the Roth conversion issue aside, they count your deductible contribution against you as income when you make it (because they require that you add it back into income amount), and they count it again against you when you take a distribution from it (because it is included in that year's AGI since it is taxable as ordinary income to the IRS).

It turns out that this bump in our income, do to that sizeable conversion, puts us just over the threshold that several top music programs have for waiving most, or even all, tuition. The potentially saving grace is that, once she has been offered admission to a school, we can petition the school to adjust our income based on why it appears so large. But that has to be done school by school and has no guarantee of success.

So, for those of you that have kids that will be starting a post-secondary education at some point, take heed. You need to look at these impacts very carefully and there is a lot of fine print.

 

It's a mine-field for sure. The FAFSA application two years ago for my girl was a maze of tricky little passages. I was lucky to be still working then and could stash income.

 

Here in Georgia, we have a "stupidity" tax. Our State Lottery profits go to fund Hope Scholarships. College students that can maintain a B average receive free tuition paid for by our stupidity tax. It doesn't cover books, food, or housing but does make college a whole lot cheaper for those who work hard to learn and earn it. It sure helped to put 3 of our kids through college.

 

Here in Georgia, we have a "stupidity" tax. Our State Lottery profits go to fund Hope Scholarships. College students that can maintain a B average receive free tuition paid for by our stupidity tax. It doesn't cover books, food, or housing but does make college a whole lot cheaper for those who work hard to learn and earn it. It sure helped to put 3 of our kids through college.

I'm not completely sure how much things have changed in this regard, but when I was an undergraduate I would routinely scour the postings outside the financial aid office and there were frequently about two dozen scholarship announcements there -- and over the course of my first year back in school after getting discharged, there wasn't a single one that I was eligible for, even though I was an honorably discharged veteran carrying a 3.8 GPA, because I didn't check off whatever identity box that particular scholarship was focused on.

While there certainly are some merit-based scholarships out there, most of them also require that you demonstrate "financial need" -- and most also "strongly encourage" members of various identity groups to apply.

I've always felt that we should encourage and reward good behavior as a way of incentivizing more of it. If government determines that certain degree areas (or vocational fields) need supporting, then it should do so by providing financial support to students that commit to and do well in those programs. At the high school level, it could do that by tying financial support for post-secondary education to a student's performance, academic and otherwise, There's a super simply way of doing that, though I'm sure that there would be some devils in the details. The state could automatically establish a 529 plan for each student that starts high school. Then each year the state makes a contribution to each student's plan based on their performance that year. It could have all kinds of categories that get support, such as certified volunteer hours and achievement in extracurricular activities, as well as for academic performance (and the academic component could be subject-sensitive so that getting a B in AP Physics received a larger contribution than getting a A in remedial math). I wouldn't be opposed to having a baseline contribution each year just for making the basic, expected progress toward graduation. Commensurate with this would be forfeiting some or all of a year's contributions for getting into trouble, either at school or in the community.

Perhaps borderline students, including students thinking of dropping out, would be more likely to stay the course if they saw their 529 plan growing at least some every year and knowing that, upon graduation, they had access to at least some resources to help them prepare for a job, be it in college or the trades. For those that truly have no desire to pursue post-secondary education, I could envision a provision that, if they stay out of trouble and off the public dole for, say, twenty years, that the 529 could be rolled over into an IRA.

 

I started a scholarship program when I was the treasurer of Jacksonville section (Savannah to Daytona and west to almost Macon) of the Instrument Society of America (now International Society of Automation). We put on a regional instrumentation vendor's showcase "table top" exposition yearly to fund our activities of the section and had excess funds hence the Scholarship and a couple of other philanthropic activities including library donations of the ISA's published Instrumentation Standards and other works. It was only a few thousand USD but our guidelines for the scholarship were pretty loose. Any engineering or science student with a decent GPA would qualify. We had a hard time giving the money away! I would ask section members to tell anyone they knew who had college students about the funds as we wanted to keep them donated within our section's territory. There were times that we would donate the scholarship to anyone no matter what their major was if they would only apply for it. My kids did get some local scholarship funds as well in addition to earning the state's Hope Scholarship plus some Federal loans for books, food, housing, and school supplies.

 

I started a scholarship program when I was the treasurer of Jacksonville section (Savannah to Daytona and west to almost Macon) of the Instrument Society of America (now International Society of Automation). We put on a regional instrumentation vendor's showcase "table top" exposition yearly to fund our activities of the section and had excess funds hence the Scholarship and a couple of other philanthropic activities including library donations of the ISA's published Instrumentation Standards and other works. It was only a few thousand USD but our guidelines for the scholarship were pretty loose. Any engineering or science student with a decent GPA would qualify. We had a hard time giving the money away! I would ask section members to tell anyone they knew who had college students about the funds as we wanted to keep them donated within our section's territory. There were times that we would donate the scholarship to anyone no matter what their major was if they would only apply for it. My kids did get some local scholarship funds as well in addition to earning the state's Hope Scholarship plus some Federal loans for books, food, housing, and school supplies.

I can believe it (about having a hard time giving the money away). I don't know what the situation was like when I was a student, given no Internet, but I know that now there are lots and lots of little scholarships out there. I was listening to Dave Ramsey one day and they were interviewing someone that was telling about how her daughter's job her junior and senior year in high school was to apply for scholarships. She ended up applying to over a thousand and got turned down for something like 90% or 95% of them. But the remaining ones paid for everything, including living expenses, for her entire college.

At one time, I had a dream that our daughter would do something comparable. Alas, not so much. She's applied for a few (maybe a dozen or so), and we are keeping our fingers crossed. But she knows that her ability to go to the school that she wants is largely contingent on her getting the scholarship support that she needs to pay for it. Worst case is that she can't afford to go to college right away and has to take a "gap year" to work and save up. On the one hand, she is a remarkably mature young woman that is extremely responsible and diligent -- far above the norm. But, on the other hand, she is still a teenager with the same short-sighted view of the world that is typical of the breed. I'm being deliberately hands-off when it comes to all of this. I'll throw out thoughts and observations and occasionally ask where things stand, but she needs to be the driver on this so that she can learn to stand on her own two feet and, if necessary, recover from any faltering she does along the way.