Top Ten Mistakes that Can Cost You Financial Aid
Sometimes, simple financial aid mistakes can cost you 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, but some of these mistakes are obvious but happen much too often.
These are the top 10 mistakes that cause students to lose financial aid for college:
- Failing to file the FAFSA. The Free Application for Federal Student Aid (FAFSA) is used to apply for financial aid from the federal government, state governments and most colleges and universities. Some families assume that they are ineligible for financial aid. Financial aid is based on financial need, which is the difference between total college costs and the ability to pay.
Wealthy students, who might not qualify for financial aid at a low-cost in-state public college, might qualify for financial aid at a higher-cost college. Also, subtle changes, such as an increase in the number of children in college, can have a big impact on eligibility for need-based aid. For example, when the number of children in college 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 October 1. Students who file the FAFSA during the first three months tend to receive double the grants, on average, of students who file the FAFSA later. About a dozen states award state grants on a first-come, first-serve basis. Many colleges have 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 colleges 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 in college. 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 for college in the child’s name instead of in the parent’s name or in a 529 college savings plan. Student assets, such as money in an UGMA or UTMA account, reduces eligibility for need-based financial aid by 20 percent 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 percent of student assets.) This is in contrast with parent assets and money in student or parent-owned 529 plans, which reduce aid eligibility by at most 5.64 percent. 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 for college in a grandparent-owned 529 college savings plan. Although 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 the 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 aid 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 2017-18 FAFSA is based on 2015 income and taxes. Increasing income during this base year, such as through capital gains and retirement plan distributions, significantly can 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.
- Failing to sign up for auto-debit on student loans. Auto-debit automatically transfers monthly student loan payments from your bank account to the lender. Not only will you be less likely to be late with a payment, but most lenders provide an interest rate reduction as an incentive to get borrowers to sign up for auto-debit.
- 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 their ability to pay, they always should appeal to the college 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 job loss, salary reductions and 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 college. Special circumstances also can include one-time events that are not reflective of ability to pay during the academic year.