As most parents know, college is expensive. Often, financial aid can help minimize a family’s total cost to attend the school of their dreams. However, there are many common mistakes that can forfeit some of this money. What you do, or don’t do, when filling out financial aid forms can cause you to lose eligibility for some things. Sure, financial aid is complicated, yet some of these mistakes happen much too often.
From our experience, we’ve identified the top 9 mistakes that cause students to lose financial aid:
- Failing to file the FAFSA. The Free Application for Federal Student Aid (FAFSA) is used to apply for financial aid from federal & state governments, as well as most colleges and universities. Financial aid is based on financial need, which is the difference between total costs and the ability to pay.
Wealthy students, who might not qualify for financial aid at a low-cost in-state public school, might qualify for financial aid at a higher-cost school. Also, subtle changes, such as an increase in the number of children in school, can have a big impact on eligibility for need-based aid. For example, when the number of children on campus increases from one to two, it is like dividing the parent income in half.
- Waiting to file the FAFSA. It is best to file the FAFSA as soon as possible after the start of the FAFSA application season on October 1. Students who file the FAFSA during the first three months tend to receive double the grants. About a dozen states award state grants on a first-come, first-served basis. Many school shave priority deadlines for financial aid applications.
There is less money available to students who file the FAFSA later than others. Even some federal aid might be limited because schools receive fixed allocations of Federal Work-Study and Federal Supplemental Educational Opportunity Grants.
- Failing to apply for scholarships. Some students wait until the spring of their senior year to apply for scholarships. By then, half of the deadlines have passed. Many scholarships have deadlines in the fall. There also are scholarships you can win in younger grades and scholarships you can win only after you are enrolled.
Some students don’t like entering essay competitions or applying for scholarships with low dollar amounts. Some students win scholarships but don’t do what they need to do to keep renewable scholarships in subsequent years. This is unfortunate because every dollar you win in scholarships is about a dollar less you have to borrow.
- Saving in the child’s name instead of in the parent’s name in a 529 college savings plan. Student assets, such as money in a UTMA account, reduces eligibility for need-based financial aid by 20% of the asset value on the FAFSA. (The CSS Financial Aid PROFILE form, which is used by about 200 mostly private colleges and universities, reduces aid eligibility by 25% of student assets.)
This is in contrast with parent assets in student or parent-owned 529 plans, which reduce aid eligibility by at most 5.64%. For example, $10,000 in the child’s name will reduce aid eligibility by $2,000 and $10,000 in the parent’s name will reduce aid eligibility by at most $564.
- Saving in a grandparent-owned 529 college savings plan. Although the money in a grandparent-owned 529 plan is not reported as an asset on the FAFSA, it has a severe impact on eligibility for need-based financial aid, much worse than saving money in the child’s name. The full amount of qualified distributions from a 529 plan that is not reported as an asset on the FAFSA will count as untaxed income to the beneficiary (the student).
Eligibility for need-based financial aid is reduced by as much as half of untaxed income to the student. For example, a $10,000 distribution from a grandparent-owned 529 plan will reduce eligibility by as much as $5,000.
- Increasing income in the base year. The FAFSA bases income and taxes on the prior-prior year’s federal income tax returns. For example, the 2020-21 FAFSA is based on 2018 income and taxes. Increasing income during this base year, such as through capital gains and retirement plan distributions, can significantly reduce eligibility for need-based financial aid.
- Failing to claim education tax benefits. The American Opportunity Tax Credit and Lifetime Learning Tax Credit are claimed on your federal income tax return based on amounts spent for tuition and textbooks during the tax year. There’s also a student loan interest deduction. But, some families fail to claim these education tax benefits because they are confusing or because they are claimed many months after the money is spent.
- Borrowing private student loans instead of federal student loans. Students should always borrow federal first, because federal student loans are cheaper, more available and have better repayment terms than private student loans.
- Failing to appeal for more financial aid. If a family has special circumstances that affect this ability to pay, they always should appeal to the financial aid office for more financial aid. Ask for a professional judgment review. Special circumstances include anything that has changed from the base year to the current year, such as a job loss, salary reduction, death or disability.
Special circumstances also include anything that distinguishes the family from the typical family, such as high unreimbursed medical and dental expenses. High dependent care costs for a special needs child or elderly parent, and one or both parents genuinely enrolled in an ungraduated or graduate program. Special circumstances also can include one-time events that are not reflective of the ability to pay during the academic year.
In addition to sharing these mistakes, there’s a lot of planning that can be done to promote a successful college experience for the student and parents alike. You may enjoy reviewing our College Planning page, including checklists for High School Freshmen through Seniors.