While many families need help paying college tuition bills, they are confused about how the financial aid process works and sometimes end up leaving money on the table. Here are ten costly myths about financial aid, and the truths behind them.
Myth: “We make too much money to qualify for financial aid, so there’s no reason to waste time with the FAFSA.”
Truth: Your Expected Family Contribution (EFC) is based on more than just income. The amount of financial aid your child is eligible for depends on a variety of factors, including the price of the school they will attend and if they have a sibling in college at the same time. Every student should fill out the FAFSA, regardless of their household income.
Myth: “Financial aid never has to be paid back.”
Truth: Over 35% of financial aid awarded is given out in the form of student loans. With this type of aid, your child will have to pay back every penny they borrow, plus interest.
Myth: “My child will be a sophomore next year, so we don’t have to worry about filling out the FAFSA again.”
Truth: The amount of federal aid your child qualifies for in one year does not carry over to the next school year. What’s more, changes in your family’s financial situation could affect the amount of financial aid your child qualifies for in future school years.
Myth: “If I save for my child’s college with a 529 plan, they won’t get financial aid.”
Truth: Money saved in a 529 plan will count as a parental asset, and could reduce the amount of your child’s aid package by as much as 5.64 percent of the account’s value. This is significantly less than other savings vehicles, such as custodial accounts under UGMA/UTMA, which are considered student assets and are assessed at 20 percent.
Myth: “We’re better off having our child’s 529 plan in his grandparent’s name.”
Truth: Assets owned by a grandparent or other relative do not have to be reported on the FAFSA, however, when the money is given to a student to pay for college it will be counted as student income. Up to 50 percent of the value of student income is considered available money to pay for school. Meaning, a $2,000 withdrawal from a grandparent-owned 529 plan given to a student to pay for school can reduce his aid eligibility by $1,000. Withdrawals from a 529 plan owned by a student or one of their parents has no effect on financial aid eligibility.
Myth: “A Roth IRA is a better college savings option for a student who will apply for financial aid.”
Truth: While retirement assets do not have to be reported on the FAFSA, any distributions you receive from your IRA this year will increase the parent income reported on next year’s FAFSA. And income has a much larger impact than assets do in the EFC formula.
Myth: “There’s no rush when it comes to filling out the FAFSA.”
Truth: In most cases, the early bird gets more financial aid to pay for college. It’s important to pay attention to federal, state and school deadlines, which are typically in January, February and March.
Myth: “Your child has to wait until you’ve filed your tax return to fill out the FAFSA.”
Truth: Even if you haven’t filed your 2015 tax return yet, you should still submit your FASFA as soon as possible if you have a child who will attend college in the fall. You can estimate your financial information based on your 2014 return and update your FAFSA after you file your taxes with the IRS Data Retrieval Tool.
However, the rules are changing for next year. For students attending college in the 2017-18 school year, the FAFSA will be available in October 2016, and financial aid eligibility will be based on 2015 tax returns.
Myth: “There’s no way we can afford to send our child to a private college.”
Truth: While the sticker price of a private college may be much higher than a public school’s, private colleges tend to award more financial aid in an effort to attract students from all income levels. In fact, after grants and scholarships are taken into consideration, you may end up paying less for private school tuition.
Myth: “When I fill out the FAFSA for my child, I only have to report the balance of her 529 account, and I don’t have to report the balance of her siblings’ 529 accounts.”
Truth: A 529 plan is considered a parental asset on the FASFA, so parents must report the total value of the 529 plans for all of their children. Keep in mind, however that having siblings can also reduce a student’s EFC, since the parent contribution portion is divided by the number of children in college.