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 about what it takes to qualify. One myth is that families with high incomes or significant financial assets 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. It all comes down to each family, your student, the specific school where you’re applying for financial aid, what types of income and assets you have, the federal financial aid rules, and the financial aid policies and final decisions made by each school.
It’s important for every student and family to apply for need-based financial aid. Never assume that you won’t qualify for need-based financial aid or scholarships.
I’ve seen families with incomes as high as $250,000 qualify for some need-based aid. On the other side, I’ve seen families earning $75,000 that didn’t qualify at a specific school. So, never make assumptions, and always apply. You don’t want to potentially miss out on thousands of dollars in grants or scholarships!
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 also huge factors.
Sadly, many students and families assume they can’t possibly afford an expensive private school or an elite college because it’s far too costly or their family makes too much money or has too much in financial assets. But not every type of asset is reported or considered as part of the college financial aid process, and many elite colleges offer need-based grants and scholarships to a large proportion of their student base, even when those students’ families have relatively high incomes and significant assets. For students from lower-income families, your aid eligibility might be quite high.
So, never assume that a school is too expensive until you do more homework on it. 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. But the key is to get an accurate assessment of your particular situation and determine if you might qualify.
Start by using my free College Money Report to enter some basic information about your family and your student, along with the top few schools that 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, savings, or trusts 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 often better off putting assets in a parent’s name, and here’s why.
When you apply for financial aid, assets and savings in parents’ names are assessed at a lower rate than those of the student. A smaller proportion of their income, assets and savings are considered readily available to pay for college, since parents are typically covering all of the family’s other expenses such as mortgages, groceries, health insurance, and many other costs.
Student assets and savings are assessed at a higher rate, meaning that a larger proportion of their money is considered readily available to pay toward college. After all, most students aren’t paying those other big bills that Mom and Dad are. In addition, parents get an asset protection amount that student’s don’t get, so a certain amount of savings in parents’ names 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 enrolled 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 eligibility and your eventual award. But 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 that 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 traditional 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.
But, in many cases, making some of those other moves could cost you considerably in financial aid eligibility based on those tax years. So, before you make moves with your investments, retirement, or other assets, make sure to consult with qualified financial professional.
If you need help with understanding the implications of your family’s income, savings, investments, and other assets, contact me to schedule an online call at your convenience. As a Certified Financial Planner®, I’m a professionally qualified advisor in retirement, investing, college, and lifelong financial planning. So, I can help you quickly determine 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 as many families assume. For others, it might actually cost more. However, there is a lot that you can do to make sure that you have the right estimates and can potentially lower your costs, and you can also avoid this and other mistakes that could make your situation far worse.
This is why you need to start with an estimate of how much specific colleges will likely cost your family, how much in financial aid and scholarships you might qualify to receive, and how much you’ll need to save and invest each month to help cover the costs when the bills come due.
With the right strategies, you can potentially lower your costs by as much as tens or even hundreds of thousands of dollars, make expensive schools more affordable, maximize your college savings, and pay for college without wiping out your finances or your retirement.
However, 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, use my free College Money Report to get the most accurate and personalized estimates of how much college will cost at the top schools on your list. You can also sign up for my College Planning Jumpstart video course, which offers a complete walkthrough of the college financial planning process and includes free access to my college financial planning software, where you can do all of your college research.
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 such as 529 plans can potentially have some great benefits in saving and growing money for college and also saving money on your taxes in the process. But sometimes you can actually have too much of a good thing.
The challenge is that many college savings plans are considered a reportable asset for financial aid applications, and they can have a negative impact on your aid eligibility. So, you need to weigh the benefits of a college savings plan against the impact on financial aid, and sometimes it can make sense to look at other alternatives.
Depending on your family situation, you might be better off saving in an alternative vehicle such as a Roth IRA, retirement plan, or taxable investments. But, to make sure you have the understanding of college savings plans in the first place, start by reading my four-part article series on 529 Savings Plans.
7. Missing financial aid deadlines.
The worst case of a missed deadline that I’ve seen cost the family around $20,000 in aid for their student’s freshman year. Just imagine finding out that you missed out on that much money!
Unfortunately, the family did not complete all the required financial documentation by the deadline, and their first-choice college did not offer them any aid. Always make sure that you know all the financial aid deadlines at each school where you’re applying. It’s important that you meet their deadlines, even if you have to estimate your taxable income from the reporting year. 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, such as credit card balances and car loans, are not reported on financial aid applications. However, your bank accounts and saving accounts are.
As a reminder, don’t forget to account for all of your debts when you’re budgeting, planning, saving, and investing for college. But, if you’re carrying some financial debts and you have opportunities to use some of your banking and savings accounts to pay them down, this can often be a good strategy, since it reduces your debt and also reduces the amount of cash in your bank and savings accounts that could work against your financial aid eligibility.
Don’t overdo it, of course, and only do this if you can truly afford to do so and aren’t going to create unnecessary risks. But don’t forget to consider your debts and this potential strategy.
9. Poor communication with schools.
This doesn’t get a lot of attention, but colleges’ admission and financial aid offices can be great allies. You want them on your side. They can’t help, though, if you don’t communicate with them.
Building relationships with the colleges that you’re interested in can start as early as a student’s freshman or sophomore year in high school. And it should be well underway by their junior year and especially when you apply in your senior year.
This can be an opportunity to learn more about admissions and financial aid opportunities, programs and majors, how to submit a winning application for admission and aid, and even to negotiate with schools once you have admissions and aid offers in hand.
10. Reporting your retirement plans as an asset.
You’re not required to report any sort of retirement plan as a financial asset when you submit your FAFSA financial aid application. Retirement plans are excluded from the FAFSA and federal financial aid eligibility because those assets are supposed to be dedicated to your retirement and not college. But this is not made very clear on the actual application, and many people make the mistake of reporting their retirement plans, often inflating their assets by hundreds of thousands of dollars unnecessarily.
That being said, there are also some colleges that also require a separate CSS Profile as part of their financial aid applications. This is an additional application profile where some schools ask you to report assets, potentially including some retirement assets, that are normally excluded from the FAFSA. At many of these schools, they require both the FAFSA and the CSS Profile.
So, make sure to check if a college where your student is applying requires the CSS Profile. If it does, then the school might consider some of your retirement assets in awarding financial aid. But don’t make the mistake of reporting those assets on the FAFSA, where they are not a factor for federal grant eligibility and for many schools that don’t consider those assets when awarding aid and scholarships.
How to Start Building a Mistake-Free College Plan
Now that you’re familiar with some of the biggest college planning mistakes that many parents and families make, it’s time to get to work on understanding how the process works and developing a mistake-free plan for your family.
One way you can do this is by scheduling a free College Planning Checkup with me. As a Certified Financial Planner® and college planning specialist, I’ve helped thousands of families plan for college, retirement, and their lifelong goals through my website, e-newsletter, podcasts, and my advising services.
In your free College Planning Checkup, we’ll:
- Review your family’s situation and your student’s college goals
- Review your potential financial aid and scholarship eligibility
- Explore the schools on your list and your estimated net costs
- Review your college financial plan, savings, and investments
- Assess your college funding goals and whether you’re on track
- Look for opportunities to help you plan and save better for college
- Recommend the best strategies for your family and your student
If this would be helpful for your family, then book some time with me now, and let’s talk about your student’s college future!