Avoiding Student Aid Blunders
Filing for student aid is filled with pitfalls. Key to the process is a form called the Free Application for Federal Student Aid (FAFSA), which is your family’s only ticket to federal, state and institutional aid, student loans and merit-based and athletic scholarships. Many make very expensive mistakes on the form, or even neglect to file it at all.
The FAFSA college cost calculation subtracts what your family can pay from the educational price tag. In college aid jargon, it’s the difference between the Expected Family Contribution (EFC) and the Cost of Attendance (COA). This determines the student’s need, and it’s the number schools pay attention to when ruling on loans, grants or scholarships.
You want to minimize your EFC as much as possible. To do this, avoid these common, financially disastrous mistakes families make when applying for financial aid:
Aggregating savings in the parents’ names. Grandparents and other family members who contribute to a child’s 529 account can be a blessing to their family, but when the account is in the parent’s name, the balance counts toward the EFC calculation. If other family members own the plans with the student as beneficiary, it’s not included in the financial aid process and doesn’t reduce the amount of financial aid available.
Also, gifts from the older generation to young relatives – Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts – in the child’s name are added to the EFC. In the vast majority of cases, it’s inappropriate to save large amounts of money in a minor’s name, and you probably shouldn’t lean very heavily on the UGMA or UTMA account for college savings at all.
Providing too much information. If the form doesn’t ask for something, don’t offer it up. For example, the FAFSA form does not ask for retirement account balances, so don’t include them in your assets. This mistake can inflate the EFC, disqualifying the student from some aid.
Missing a deadline. Student aid is doled out on a first come first serve basis. Fill out and return the forms as close to the beginning of January as possible. In California, the priority deadline is March 2, but aid awards begin in January. You can estimate prior-year income and tax information, and then file an amended application after you file your tax returns.
Providing the wrong parent’s financials. For divorced or separated families, the FAFSA form only requires income and asset information for the parent who the student lives with most of the year. Don’t make the mistake of including the other parent’s income or assets as this double’s the expected family contribution.
Not filing the FAFSA form. Many families assume that they don’t qualify for financial aid because they have high income and assets, but the student needs the FAFSA to be eligible for merit or academic scholarships, as well. Every family needs to complete the FAFSA.
Assuming private schools are more expensive than state colleges. Sure, the posted tuition is usually higher at private schools, but your key consideration should be how the school helps families with unfunded need. The vast majority of state schools require families to take out private loans or just leave the need unfunded. Well-endowed private schools often fund need with grants, vastly decreasing the total cost of attendance.
In many cases, the cost of attending a private school is actually lower than the cost of attending a state school. Do the research on colleges, understand how much of their financial aid is met with scholarships, grants and work study. The College Board is a great site for researching colleges and financial aid at different institutions.
This is in no complete guide to strategic planning for college funding, so you need to do your research. Talk to your advisor as early as possible for customized expert advice through the application process to avoid costly mistakes.
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Hilary Martin, MBA, CFP, is a financial planner at The Family Wealth Consulting Group, a fee-only planning firm providing personalized advice, guidance and service to successful individuals and their families in Silicon Valley. She regularly writes about personal finance on the firm’s blog, Healthy Wealthy Families. You can find her on Twitter @WealthyFamilies.
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