In the years I’ve spent helping families plan for college, I’ve encountered a number of families who came to me after they had already made some major mistakes that cost them thousands of dollars in financial aid, created unnecessary college costs, or even derailed their college plans.
Fortunately, I was able to help most of them avoid those mistakes with the next children they sent off to college, and we minimized or reversed some of the damage.
Here are the top 10 college planning mistakes that I’ve see families make, plus some proven advice to help you avoid them.
1. Assuming you won’t qualify for need-based aid. Financial aid calculations are relatively complex, and there are a lot of myths out there about what it will take to qualify. One myth is that families with high incomes won’t qualify for need-based financial aid. Another is that families with lower incomes will always qualify for aid.
Neither of these is necessarily true, so it’s important for every student and family to apply for need-based financial aid. Never assume that you won’t qualify for financial aid.
I’ve seen families with incomes as high as $250,000 qualify for some need-based aid. On the flip side, I’ve seen families earning $75,000 not qualify. But you don’t want to miss out on potentially thousands of dollars in grants or scholarships, so make sure you apply.
The big factor in many of these cases is the school your student wants to attend. Often it comes down to how expensive the school is and how generous it is with financial aid. The quality of your student and how desirable they are to a given school is also a factor.
Generally speaking, you are more likely to qualify for need-based aid if your income and financial assets are lower or if your student is applying to a relatively expensive school. The key is to get an accurate assessment of your particular situation and determine if you might qualify.
Start by using my free College Financial Report to enter some basic information about your family and your student, along with the top few schools you’re considering, and you’ll get a personalized report with an estimate of how much those schools think you can afford and how much aid you might qualify to receive.
2. Starting your planning too late (or not at all). College planning is a big undertaking, and there are many tasks that students and parents need to complete as part of the process. So you need to start as early as possible, to learn what you’ll need to do and give yourself time to schedule and do it all.
Additionally, financial aid qualification is based on the family tax year from your student’s junior year in high school. There are some smart adjustments you can potentially make to your income, assets and investments during this crucial year, to maximize your aid eligibility. But, do do that, you need to start early and make those adjustments by the start of your student’s junior year in high school, or as quickly as possible after that.
I’ve never had anyone tell me they started their college planning too early. But there are a whole lot of people who’ve said they started too late, so get started and get to work!
3. Putting assets or savings in your student’s name. It’s generally not a good idea to put any financial assets or savings in your student’s name. Sometimes it makes sense for tax purposes, but it’s a bad idea when it comes to financial aid.
Families are better off saving and putting assets in mom or dad’s name. When you apply for financial aid, assets and savings in the parents’ names are assessed at a lower rate than those of the student, and a higher percentage of the student’s assets and savings are considered to be readily available to pay toward college. In addition, parents get an asset protection amount that student’s don’t get, so a certain amount of savings in their name will have no negative impact on financial aid qualification.
This is also true if Grandma and Grandpa or other family members are going to help save toward your student’s college costs. It’s better to keep the money in their own names or put it in accounts under the parents’ names. Keeping it in their own names ensures that the money doesn’t have to be reported or assessed for financial aid purposes at all.
Thus, it can make sense for Grandma and Grandpa to keep their money in their own name and simply withdraw and give portions of that money to your student while they’re in college. They can keep doing that until the last financial aid application and form is submitted for the last year of college.
For a graduating college senior, the last financial aid forms are submitted in February of their junior year in college. Therefore, grandparents can help with paying for the senior year as well as pay off loans without having a negative impact.
4. Increasing parent income in the base tax year. Parents’ adjusted gross income on their tax return can have a huge impact on financial aid. Many families inadvertently increase their income in their base year.
For student’s going off to college, the initial base tax year is their junior year in high school. In the college financial world, we call this the “prior-prior” year.
Starting in January of your student’s junior year in high school, you need to make sure you manage your income with financial aid in mind, and you’ll need to continue to watch your income for as long as you have kids in college.
Some things you may want to avoid would be selling investments with a capital gain, taking withdrawals from retirement plans, receiving large bonuses from your company, and converting IRAs to Roth IRAs. A word of caution, however, is that reducing your income only makes sense to a point. As an example, declining a $20,000 bonus from work would be foolish because the cash in hand is almost always more valuable than the potential financial aid benefit.
If you need help with understanding the implications of your family’s income, savings, investments and other assets, and you want to explore strategies to help you maximize financial aid qualifications and potentially lower your college costs, contact me to schedule an online call at your convenience, and let’s see what makes sense for your family.
5. Failing to plan for the real cost of college. College isn’t cheap, but it’s also not as expensive for many families than they assume. For others, it might actually cost more. And there is a lot you can do to potentially lower your costs, while you can also make mistakes that could make your situation far worse.
This is why you need an estimate of how much specific colleges will likely cost your family, how much financial aid you might qualify to receive, and how much you’ll need to save and invest each month or how much you’ll need to pay when the bills come due.
With the right strategies, you can potentially lower your costs significantly, maximize your college savings, and pay for college without wiping out your finances or your retirement.
But not every strategy will work for every family, so you need to understand what specific strategies will work for you. Be wary of any strategy that starts with “always” or “never.” Most family situations are very different from one another, and there are very few one-size-fits-all strategies.
To get a great start on what you need to know and how to start working on the right college financial plan for your family, sign up for my College Planning Jumpstart video course. In the course, I walk you through everything you need to know to create a winning college plan, potentially make college much more affordable, and put your student on the path to a bright future.
6. Overuse of college savings plans. Don’t get me wrong, some college savings plans have wonderful tax benefits, but sometimes you can have too much of a good thing. The challenge is that many college savings plans are considered an asset for financial aid and they can have a negative impact. Depending on the family situation you may be better off saving in an alternative vehicle such as a Roth IRA, retirement plan or taxable investments.
7. Missing financial aid deadlines. The worst case of missing deadlines that I have seen cost the family around $20,000 in aid for the student’s freshman year. The family did not complete all the required documentation by the deadline and their first choice college did not offer them any aid. Typically, colleges require that financial aid forms be submitted by February 1 or February 15. It is important that you meet their deadlines even if you have to estimate your taxes. If you use estimates, you have the opportunity to amend things if your estimates were not accurate.
8. Neglecting your debts. Generally speaking, consumer debts (credit cards, car loans…) are not reported for financial aid. Your bank accounts and saving accounts on the other hand will be counted against you. It often makes sense to reduce your assets by paying down your debts.
9. Poor communication with the schools. The colleges’ admission and financial aid office can be great allies. You want them on your side. They cannot help however, if you do not communicate with them. Building relationships with the colleges you are interested in can start as early as a freshman or sophomore year and should be well underway when you apply in your senior year.
10. Reporting your retirement plans as an asset. You’re not required to include any sort of retirement plan as an asset when you fill out financial aid forms. It is not made very clear on the actual form and many people make this mistake, often inflating their assets by hundreds of thousands of dollars unnecessarily.