FAFSA Changes and College Savings Strategies

Key Takeaways

• Don't assume new FAFSA changes hurt you—most families will see lower expected contribution amounts, except those with multiple children in school simultaneously (who may see costs increase)
• Avoid using 401ks to pay for college if under 59.5: you'll owe a $3,000 penalty on a $30,000 withdrawal, but rolling to an IRA first then withdrawing eliminates this penalty
• 529 plans typically outperform 401ks for college savings because they offer tax-free growth and withdrawals for education, whereas 401k distributions add taxable income that reduces financial aid eligibility
• Retirement accounts are excluded from FAFSA asset calculations, but distributions count as income—meaning using a 401k withdrawal for tuition increases your income and may disqualify you from aid
• Evaluate the complete tax picture including education credits, investment options (like EE Bonds), and the net impact on financial aid rather than looking at any single account type in isolation