Mistakes Were Made
We asked experts to name the financial aid blunders families tend to make. Here are the top 10 and how to avoid them
1. FAILING TO FILL OUT THE APPLICATION
The easiest way to come up short on financial aid is to not apply, a mistake that about 25 percent of undergraduates make. "A lot of people assume they won't qualify if their next-door neighbor said they didn't qualify or if their parents think back to the way it worked 25 years ago," says Mark Kantrowitz, publisher of Finaid.org, an online resource for financial aid.
Not only does that prevent you from receiving need-based financial aid; it also takes federal loans off the table. All students, regardless of need, can borrow up to $23,000 in federal Stafford loans over the course of their college education, starting at $2,625 their first year. The one catch? You have to fill out the Free Application for Federal Student Aid (FAFSA). The form asks for details about your family's income, savings, and other assets to determine how much you should be able to contribute toward college costs. That resulting number is called your expected family contribution, or EFC. Financial need is then calculated by subtracting the EFC from the school's cost of attendance.
That completed FAFSA can really come in handy if unforeseen circumstances arise midyear. "You may not need the money today, but anything can happen in the middle of the year, like divorce or the death of a parent," says Craig Munier, financial aid director of the University of Nebraska-Lincoln. "When that happens, we can adjust more quickly if you've applied." The FAFSA can be filled out online at www.fafsa.ed.gov.
2. SAVING IN YOUR CHILD'S NAME
When little Sally was born 17 years ago, you wisely started a savings account in her name, right? Now you hope her little stash will go a long way toward covering the astronomical costs of college.
Well, that money will certainly help, but not nearly as much as if you'd kept it in your own accounts. That's because the expected contributions are weighed differently for students and parents. Parents--with their myriad financial responsibilities--are expected to devote only 5.64 percent of their assets to college costs. Students, on the other hand, must fork over 35 percent. Say Sally has $30,000 saved. She'd be expected to contribute $10,500 this year, and her aid would be lower to reflect that. With that same amount, her parents would be expected to contribute only $1,692 toward her family's total EFC.
How can you undo what's been done? The money is legally your child's, and there could be restrictions on moving it into your bank account. "The only way to transfer the money is indirectly," says Kantrowitz. "In the first year, spend those assets to zero before touching the parents' money." Next year you'll qualify for more aid.
A better plan for your next child would be to put money in a 529 plan, which allows families of all incomes to contribute between $146,000 and $305,000, depending on the state, to a tax-deferred savings account and then withdraw money for education tax free.
3. MISSING OUT ON SCHOLARSHIPS
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