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
8. BUYING WHAT THEY'RE TRYING TO SELL
Just because your school's financial aid office suggests a certain lender doesn't mean you should use it. Many schools strike deals with "preferred lenders," who agree to ease some of the processing hassles for the aid office in exchange for having their loans promoted. Most families just go with what the school recommends.
St. Louis-based advertising executive Susie Weitzer did not. She estimates that her family will have borrowed $80,000 in federal loans to fund their son's education at the University of Maryland-College Park and their daughter's at Indiana University-Bloomington. But almost all their loans have come from the Missouri Higher Education Loan Authority (MOHELA), a nonprofit agency established by the state to service education loans. Other states have similar agencies whose nonprofit status allows them to offer better rates than traditional lenders can. While the rates for federal loans are low--currently 2.77 percent for the Stafford while in school and 3.77 percent after graduation (they are expected to rise July 1)--MOHELA borrowers who opt to pay through automatic debit get a 2 percentage point reduction. So a PLUS loan, with a rate of 4.17 percent, can be taken at 2.17 percent.
But outside loans require more work for the financial aid office. Be prepared to fill out extra paperwork and stay on top of the process if necessary.
9. ROBBING THE WRONG PIGGY BANK
Planning on borrowing from your 401(k) to help pay for junior's tuition bills? "Don't do it!" warns Case. Although it is tempting to tap your pot of gold, especially if you have last-minute needs, most financial aid pros advise against it. For one thing, you are dipping into funds you will undoubtedly need more of one day. And full payback, with interest, may be due immediately if you lose or change your job. Even if you stay with your current employer, you'll have to pay the money back over five years. Parents are better off using a home equity line, but only after exhausting all federal loan options, which are likely to have much better rates.
Letting your credit card balance grow with the hopes that higher debt levels will lower your EFC won't help either. "Debt will not factor into your eligibility process," says Paul Lynskey, director of secondary school relations for the Massachusetts Educational Financing Authority. However, it might hinder your ability to get loans that require a credit check.
And getting a second job to help cover the bills is not really in your best interest. Next year's application will be based on this year's income, so you could adversely affect how much aid you receive in the future.
10. LEAVING FUN OFF THE BUDGET
You've added up the price of tuition, room and board, and books, and you've subtracted your free money. But the result isn't all you have to pay. There will be plane tickets home, a loaded laptop, pizza deliveries, and movie dates. Living off campus requires spending for furniture, utilities, and rent. And the new hometown could be really pricey. Small-town schools like Elon University in North Carolina estimate yearly personal expenses at around $1,400. Big-city Harvard suggests budgeting as much as $2,570.
Unfortunately, Allison Sandera didn't notice what New York University's estimate was. The budget bust hit almost immediately when the then 23-year-old moved from Torrance, Calif., to Manhattan last year. "I assumed it would be comparable to L.A., but it's not," she says. "Food, rent, everything was more expensive." Unable to make her financial aid package stretch far enough, she left after one semester. Now, she is working two jobs back in Los Angeles to save enough money to return in the fall.
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