Paying for college is complicated. The ways that colleges decide on aid packages can seem mysterious, and the number of outside scholarships supposedly available can be overwhelming to navigate. Because of these challenges, students and parents routinely end up paying more for college than they really needed to—but you can avoid this trap. Here are 10 common mistakes people make when paying for college…
Not filling out the FAFSA before your child starts college. The Free Application for Federal Student Aid, or FAFSA, is the application form for federal college loans and grants as well as a form that many public and private colleges use to determine aid eligibility. Some parents choose not to fill out the FAFSA out of fear that it will hurt their children’s chances of gaining admission, but this is almost never a good idea. Some colleges are completely blind to financial need, and even most colleges that consider an applicant’s ability to pay still offer a high number of need-based aid packages each year.
Regardless of each college’s policy, if you won’t be able to afford the costs of college over a four- or five-year period, it’s important to apply for aid before your child’s first year of college. If you don’t, you won’t be considered for aid from the college in subsequent years unless your financial circumstances change drastically. Even families with substantial incomes often qualify for scholarships and grants of some sort. Some private colleges, for example, provide need-based aid to some students from families that earn more than $200,000 per year.
Students can submit the FAFSA as early as October 1 of the year before they plan to begin college.
Not continuing to fill out the FAFSA every year. Even if you didn’t get as much aid as you were hoping for in previous years, continue to fill out the FAFSA every year that your child is in college. Various changes in your financial situation can have a big effect on the amount of aid you receive (as long as you filled out the FAFSA for the first year your child was enrolled in college). For example, having another child begin college can result in a substantial bump in aid.
Overestimating the amount of merit-based aid your child will receive. Only about 0.2% of college students receive more than $25,000 in scholarships, and only about 0.6% receive enough scholarship and grant money to cover a single year of college. Even high school valedictorians or salutatorians are unlikely to receive enough aid through academic scholarships alone. There are more than 75,000 high school valedictorians and salutatorians each year and many thousands of students with perfect GPAs or test scores. Instead of counting solely on merit scholarships, plan to pay for college with a mix of need-based aid, merit-based aid, money you have saved and—if necessary—loans.
Failing to apply for scholarships.Even if your child won’t have all his/her tuition covered by merit-based aid, it still is worth applying for several scholarships—and your child may be eligible for more than you realize. Examples: There are special scholarships for students involved in social or economic justice movements…or with strong volunteering experience…or from particular backgrounds. Many scholarships are awarded for outstanding essays or poems.
Search for scholarships that fit your situation using an online database and matching service. Peterson’s, Cappex, Niche and many other sites offer free, customizable scholarship searches. Note that some scholarships, especially local ones, are deliberately left off such lists because the scholarship providers don’t want to be inundated with applications from ineligible students. So go a step further in your search by consulting Peterson’s annually published book Scholarships, Grants & Prizes and asking your child’s school guidance counselor to search for opportunities.
Not answering all optional questions from a scholarship-matching service. Online scholarship databases are powerful tools for discovering aid opportunities, but they require you to answer qualifying questions to find your best opportunities. Many people, whether out of impatience or concerns for privacy, neglect to answer all of the optional questions asked by these services. But these optional questions are often the ones that uncover scholarships that match students’ specific interests and backgrounds.
Answering questions about your family’s medical history, for example, can help you discover scholarships available to students whose family members have had particular illnesses such as cancer. There also are scholarships available for students interested in particular study areas such as animal welfare or veterinary medicine. Be sure to answer every question you are asked.
Paying from a 529 college-savings account owned by a grandparent. Any 529 college savings plan accounts owned by students or custodial parents are reported as parent assets on the FAFSA and reduce need-based aid by, at most, just 5.64% of the accounts’ value. (In the case of divorce, a noncustodial parent’s assets typically are not considered in financial-aid calculations.) But 529 accounts owned by grandparents (or anyone besides students or custodial parents, including a noncustodial parent) are not reported as assets on the FAFSA at all. Instead, distributions from these accounts count as untaxed income to the student, which reduces the amount of financial aid he/she might receive by as much as 50% of that income’s value. To remedy this situation, you can roll a grandparent- or noncustodial-parent 529 account into a parent-owned 529 immediately after filing the FAFSA provided that both accounts are in the same state. (If you roll it over before filing the FAFSA, its value must be reported as a parent asset and will therefore reduce aid eligibility.)
Alternatively, instead of rolling over a grandparent’s 529, you could wait until after January 1 of your child’s sophomore year of college to take distributions from that 529 (assuming your child expects to graduate after four years of college). Financial aid for any given school year is calculated using the family’s tax return from two years earlier. That means that if the student will be a senior in the 2017–18 school year, there should not be a distribution earlier than January 1, 2016, which is the middle of the sophomore year.
Withdrawing too much money from a 529 account in a calendar year. If the college expenses you pay during a calendar year are less than the amount you withdraw from your 529 account the same year, the difference probably will be counted as an “unqualified withdrawal” on which you will have to pay income tax and a 10% penalty. To protect against this, don’t withdraw money late in a calendar year to pay for the next year’s college expenses.
Saving cash for college rather than paying down credit card debt and auto loans. If you have several thousand dollars or more of credit card or auto-loan debt and enough money in a bank account to pay off all or part of that debt, do so before filling out the FAFSA. Such consumer debt (as opposed to, say, mortgage or home-equity debt) doesn’t give you any advantage when applying for need-based aid, but the money sitting in your bank account or investment account will be counted against you.
Choosing the wrong tax credit. There are three main college-related tax credits available to taxpayers—the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit (LLC) and the Tuition and Fees Deduction—but the tax code restricts you from claiming more than one of them at a time. The option that will save you the most money if you’re eligible for it is the AOTC, which provides a tax credit of up to $2,500 per year for tuition, fees and course expenses per student. (The credit is equal to 100% of your first $2,000 in qualified expenses and 25% of your second $2,000.)
To be eligible for the AOTC, students must be enrolled at least half time in a degree program, and parents must have modified adjusted gross income of $90,000 or less (filing single) or $180,000 or less (married filing jointly). Also, you can’t claim the AOTC for expenses that you covered with funds from a 529 plan. So if you have a 529, use other cash or loans to pay for up to $4,000 per year in tuition, fees and course expenses, then use 529 money to cover any remaining expenses.
Failing to appeal for more financial aid. Many people don’t realize that they can appeal to a college for more financial aid— even in the middle of an academic year—if their financial circumstances have changed in certain ways. Common examples of such changed circumstances include job loss, a death in the family that affects finances, an increase in the number of children enrolled in college, unusually high unreimbursed medical and/or dental expenses, disability-related expenses and expenses resulting from natural disasters. Different colleges handle financial-aid appeals in different ways—ask your child’s college’s financial-aid department whether it has forms you should fill out or whether you need to provide a letter detailing your new circumstances. And be sure to provide independent, third-party documentation, such as from employers, teachers, clergy or court officials, of the changes in the family’s situation.