Don’t let a low income prevent you from building a retirement nest egg.

Check College Funding Eligibility After Income Changes

Check if changes in income affect a student’s eligibility for federal or university financial aid.

Don’t let a low income prevent you from building a retirement nest egg.
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An increase or decline in salary can affect a parent's need to save for a child's future or current college education. A $5,000 income increase, for instance, can alter eligibility for federal educational tax credits, while a $5,000 drop in income could mean thousands in additional financial aid.

How much that change affects financial aid depends on the parent's initial income level, says Jim Brooks, University of Oregon financial aid director. An increase from $20,000 to $25,000 likely won't affect financial aid as much as an increase from $75,000 to $80,000.

In the university's view, someone who makes $25,000 will still have obvious financial need. But the higher the income level, the more likely additional dollars earned might push the parent out of that particular university's income range for giving out need-based financial aid.

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Parents should evaluate their eligibility for the following funding sources in the wake of an increase or decrease in income and change their savings plans accordingly.

1. Federal financial aid and Pell Grants: The FAFSA4caster is a prediction tool for the Free Application for Federal Student Aid, but it only uses limited information, Brooks says.

"Parents can predict Pell Grant eligibility, a federal income-based education grant, but that's it," he says.

For both Pell Grants and other forms of aid, having more than one child in college at the same time will affect aid eligibility in a positive way, Brooks says. If the expected family contribution – the number calculated by the Department of Education that helps determine financial aid eligibility – was $10,000 with one student in college, it will be $5,000 each for two students.

2. University financial aid: While not an exact prediction of financial aid awards, check net price calculators to see how much of a difference an income change will make in the financial aid a student could receive from his or her school.

"You have to use the tuition calculator on each college's website so you can get a realistic view of financial aid based on income," says Leah Ingram, a parent and the founder of suddenlyfrugal.com, a personal finance website. "That way you are not going into saving or paying for college blindly."

Parents with kids close to or in college should talk to financial aid offices about income changes.

"I can't stress enough the importance of talking to the institution and exploring alternatives before stressing about the amount of financial aid that could be awarded," Brooks says.

A change in income may not affect aid as much as parents think, he says. If a parent provides documentation of a drop in income to the university's financial aid office, the school could increase their child's financial aid.

"Parents can't preplan for income changes," he says. But they can gather as much information as possible when it happens.

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3. Federal education tax credits: Income limits for these credits vary depending on whether the student is an undergraduate or in graduate school. A rise or fall in income could increase or decrease a parent's eligibility.

For instance, the American Opportunity Tax Credit awards parents up to $2,500 per student with an income limit of $90,000 for a single filer or $180,000 per married couple. If a single parent's income rises above $90,000, he or she would no longer have access to the tax credit.

The $2,000 Annual Lifetime Learning Credit has an income limit that's nearly a third less. Parents should review IRS Publication 970 for any and all education benefits they might be eligible to receive.

4. 529 plan grants: Some of the tax-advantaged college savings accounts known as 529 plans offer matching grants for contributions based on income. In Nevada, the household adjusted income limit is just under $75,000. If parents don't meet the income requirements, they could lose $300 per year in matching contributions.

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