Mistake #1 – Failure to complete the FAFSA and/or CSS Financial Aid Profile
Your child’s school of choice will require either the FAFSA, or the Free Application for Federal Student aid, or the more detailed CSS Financial Aid Profile. Both forms are due in January of the student’s senior year in high school and annually thereafter until graduation.
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"Our clients often ask why they should bother filling out the FAFSA or CSS profile if they don’t qualify for financial aid," Bauer said. "We tell them it’s absolutely essential that any family that doesn’t want to spend more than they have to for a college education submit these forms on time. Failure to do so will take your student out of the running for even merit-based scholarships."
Mistake #2 – Not taking steps to reduce your income
Financial aid is primarily based on your income, as well as a portion of your assets. The formula also counts student assets and income at a higher rate than the parents’. "While you cannot "hide" assets or income on financial aid forms – a commonly asked question – you can take steps to "spend down" certain assets or defer income, which is a smart move," Bauer said.
For example, fully funding your retirement directly reduces income and adds to your retirement assets, which are not counted in the financial formula and will not hurt jeopardize financial aid. If possible, it also can help to defer income from one year to the next. Finally, if you have money in a savings account, consider using it to pay down your mortgage. You are not expected to use your home equity to pay for college, but you are expected to tap your savings.
Mistake #3 – Failure to spend down student assets
Many families use UTMA or UGMA accounts to save for college. However, these accounts count as assets in the student’s name. Instead, use UTMAs for other expenses you might pay for yourself including private high school tuition, a school trip, summer camp, a car for the student, and even braces. Then, put the money you might have used for those purchases into a 529 plan instead.
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By GlobalDataMistake #4 – Not registering 529 plans in the parent’s name
While assets registered in the student’s name count 20 percent toward the financial aid equation, those registered as UTMA529s are treated as parental assets and count at only 5.64 percent. However, non-parental 529 accounts – registered in a grandparent’s name, for example – won’t show up on the FAFSA, but when used, will count as aid to the student, reducing the following year’s aid dollar for dollar.
Mistake #5 – Forgetting the estate planning benefits of 529 plans
529 plans have a special feature — known as accelerated gifting — that allows you to contribute up to a maximum of $70,000 (individual) or $140,000 (married filing jointly) to a single beneficiary in the first year, but then elect to treat the gift as if it were made evenly over a five-year period. Wealthy grandparents looking to reduce their estate can help fund a college education through an early and substantial gift into a 529 account.
Mistake #6 – Allowing a family member or friend to pay a tuition bill too soon
"From an aid perspective, accepting a direct tuition gift can do more harm than good, as that payment will count against future financial aid grants," Bauer said. "A better option is to make a gift to the parent who then pays the tuition bill. Or, defer acceptance of the gift until the student’s senior year when future aid is no longer an issue."
Mistake #7 – Falling for college planning schemes
"We’ve seen even savvy investors fall prey to ‘too good to be true’ schemes," Bauer said. "A common one involves transferring assets away from 529 plans to fund insurance policies for a child’s education that will not be counted as part of the financial aid equation. However, in many cases these policies do real harm by locking away assets that would otherwise be used to pay for college."
Mistake #8 – Failing to negotiate with your top school
If your child’s second choice school offers a better package than his first, let his first choice school know. According to Bauer, "Once a school admits your child, they really want him to enroll. Let them know you are interested and tell them what you’ve got. Some will negotiate. You can’t do this with every school, but you should do it with the ones you are serious about."
Mistake #9 – Not talking with your child in advance about how much you are willing to commit to his or her education
Whether you want your child to have some "skin in the game" and pay for a portion of the costs or if you are simply unwilling to pay the top-dollar tuition some private schools charge, it is important to talk with your child earlier rather than later. Make it clear what you are willing to contribute, and discuss other options to bridge the gap such as getting a part-time job or borrowing money. Being upfront about the financial commitment you intend to make may help guide your child to narrow her choices and select a less costly school.
Mistake #10 – Failing to talk with your child about the ramifications of taking on too much debt
If your child selects a high cost college and takes on debt to meet the tuition cost, he or she can end up with tens of thousands of dollars of debt. National student loan surveys suggest that students with significant loan debt delay important life stages such as purchasing a home (40 percent), marriage (19 percent), and children (22 percent).1
"Qualifying for Financial Aid" provides an overview of how the annual Expected Family Contribution (EFC) for a student is calculated. To schedule an interview with Susie Bauer on this or related topics, contact Amy Nutter, Baird Public Relations, at (414) 765-3988 or anutter@rwbaird.com.
