The world of college funding and financial aid is filled with myths and misconceptions. Each year, thousands of parents enter this arena with little, if any, preparation. As a result, they end up making one or more of what we have come to call Deadly Mistakes. If you’re one of these parents, these mistakes could end up costing you hundreds, even thousands of dollars in lost financial aid. On the other hand, if you can manage to avoid making the worst of these mistakes, your reward could be measured both in dollars and in the satisfaction of knowing you did EVERYTHING POSSIBLE to help your child get into the college of their dreams without sending you to the perpetual poorhouse. So, without any further delay, let’s explore…
Reality: The financial aid system is designed to help level the playing field, so college does not become the exclusive playground of the wealthy and the well-connected. It doesn’t always work as advertised. But the financial formulas built into the system—if you understand how they work—can help make college affordable for your children. With that in mind, you must never assume you will be denied financial aid due to your income or your assets. That’s precisely what the colleges hope you do. Obviously, parents in the top 1% of income will be regarded differently than parents who earn much lower incomes. And single-parent families are a category all their own when it comes to income and assets, as are those with severe hardships. But the bottom line is: There is absolutely no reason for any family to opt out of the only system we have to help your children afford the school of their choice.
Reality: Private scholarships, like those Disney and Microsoft publicize, make up only 1% of all the aid available to help pay for college. The other 99% comes from a combination of Uncle Sam, your state, the colleges themselves, and a handful of banks that lend money for college. It should stand to reason that you’re far more likely to find money there, since there is so much available to those who know how to claim it. That is your job as the parent of a college-bound student. Find the money, qualify to receive it, apply for it, and claim it.
Reality: Do you believe significant financial aid is available only to student athletes, the academically gifted or members of certain ethnic or religious groups? Well, nothing could be further from the truth. “Need-based financial aid” is normally awarded without regard to a student’s talents or family background. Such aid is calculated using one of two very carefully crafted “need analysis formulas”. They are known as the Federal Methodology and the Institutional Methodology. In each case, the formula leads to a number called the EFC, or Expected Family Contribution. That number is forwarded electronically to the colleges, which will use it to determine how much financial aid to offer your student. Sure, the colleges with large endowments can dangle extra dollars to attract high quality kids. But for most students, it’s the EFC that counts the most and the need-based aid that will make college affordable.
Reality: As we’ve just explained above, colleges with lots of money can (and do) offer extra funds to attract certain students. For example, one well-known private school has four different scholarships for accepted incoming freshmen, awarded on the basis of high school GPA and standardized (SAT/ACT) test scores. A student scoring in the highest tier can qualify for upwards of $50,000 in free money over four years. If a student is in a lower tier, his aid will drop significantly. Miss the cut altogether and you can forget about any “merit aid”. Information like this is available to those who seek it out. So why waste time and energy focusing on colleges where your student has little chance of receiving decent amounts of aid when there are good schools where merit aid could reduce your out-of-pocket costs each year.
Reality: Unless your last name is Hilton or Rockefeller, it’s a pretty good bet you or your student (or both) will end up with some amount of debt at the end of her quest for a degree. Because of a lack of understanding of financial aid, many parents dismiss loans as some second class form of aid they don’t expect ever to need. The truth is college is Big Business, just like Big Oil or Big Tobacco. Colleges have huge overheads, they are constantly expanding and improving, and that means ever higher costs passed on to you and your student. Just as most of us could never walk into a dealer and pay cash for a new vehicle, it’s unreasonable to think you can afford to pay for college each year for four years (or more) without borrowing something. If your student is a high school senior now, he or she will be applying for a student loan in a few short months. You may be doing the same. So do your homework now and find out how these loans work, so you can make intelligent decisions for your student and yourself next spring.
Reality: The average American family owns a variety of assets: Your home, maybe a vacation property, savings and checking accounts, retirement accounts, savings bonds, 529 plans and more. All financial aid forms include will ask you to list assets. How you answer those questions will help determine how much financial aid your student will qualify for. The fact is that some assets must be included on the forms whiled others may be ignored. 100 percent legally! In fact, until the time you file the financial aid forms, it may even be possible to “reposition” certain assets so they no longer need to be reported on the forms. By doing so, your family could become eligible for additional financial aid. But, be very careful! Moving assets might trigger an unwanted tax bite or even make your financial aid situation worse. Therefore, it is absolutely critical that you consult a qualified CPA or college funding professional before attempting to move your assets in search of additional financial aid.
Reality: If there’s anything parents think they know about financial aid, it’s the urgent need to get every last dollar out of the student’s name before applying. Some parents move money into the accounts of younger siblings who have years to go until college. Others buy things they’re not sure the student will need, such as a car or upgraded computer, just to get the money out of the kid’s name. Good idea? Not always. College financial aid officers are smart. They know by examining tax returns and other records whether there have been any frantic, last minute moves to empty out student accounts. If they suspect hanky panky, they have the right to deny financial aid altogether. Would you risk that to save a few hundred dollars?
Reality: Financial aid calculations are based on the previous years’ income tax returns. Therefore, its imperative to begin thinking, planning and acting on financial aid long before you sit down at the computer to fill out those forms. And while it’s best to begin this process while the student is still a junior, it’s not too late. But it will be soon. Our advice: Get cracking and start tonight to prepare for the financial aid applications that will soon need completing. Remember, this is not a one shot deal. College goes on for four years, and financial aid applications must be completed each year. So even if you miss out on some aid the first year, there are still three more years to go.
Reality: Most tax preparers do a good job with your 1040 form. But only a tiny fraction of tax preparers know anything about college funding. With the complex financial aid rules changing all the time, there’s only so much a standard tax preparer can be expected to know about college funding. That may be why so many CPAs send their clients to us to deal with financial aid. If there’s ever a time when you may need help from a specialist, that time is now!
Reality: Ask anyone who’s gone through it recently and they’ll tell you. The process of applying for college financial aid is more complicated than ever, despite promises from the Department of Education to streamline and simplify it. Every year the forms continue to grow in quantity, in size, in complexity and in the kinds of personal and financial information required to complete them. Most schools won’t even accept paper forms anymore. Everything must be done online and on time.
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