College financial aid myths persist and they can be a big danger to your financial health. If you don’t understand how the college funding system works, you’re likely short-changing yourself now and in the future.
Most people right now are scurrying around trying to get their income taxes prepared and filed. If you’re a parent of a college student or a college-bound high school senior, you’re probably also trying to figure out how and whether to file a college financial aid form. But even if your student isn’t enrolling next year, you need to consider your next moves ahead of time so that you position yourself in the best way to balance your ability to fund college and still have a life (and a retirement nest egg) after graduation.
The financial aid application process begins on January 1 for schools participating in the federal financial-aid program. Students who are in the second half of their senior year in high school should fill out the Free Application for Federal Student Aid (FAFSA). Other private schools may also require the CSS/Financial Aid PROFILE to be completed sometimes as early as the fall of the student’s senior year in high school.
There are many myths that persist about college financial aid. During my webinars and on my website, I’ve detailed many of these myths which include:
- Not enough financial aid is available
- Only students with good grades get financial aid
- You need to be a minority or from a poor family to get financial aid
- I make too much money to qualify for any aid
- Saving for college disqualifies a family for financial aid
- Student loans aren’t worth it
- My child will get a full-ride scholarship so I don’t have to worry
- You only need to fill out financial aid forms once
All of these myths are false. Period. As I detail on the CollegeCashPro.com website, there is aid out there. You just need to understand what’s available and the difference between ‘grant’ or ‘merit-based’ aid that doesn’t need to be repaid and ‘self-help’ or ‘needs-based’ aid which may include loans that need to be repaid.
Aid is available to anyone regardless of minority status or academic achievement. Sure, some scholarships may be tied to academic performance or ethnicity but that’s not everything that’s available.
And while family savings do factor into the college financial aid formulas, they don’t really hurt you .. if you understand how to properly position your assets.
Recently, Morningstar posted their own 5 Myths About College Financial Aid which covers much of what I’ve noted in my infographic.
But the most dangerous and misguided myth: Filling out the FAFSA is a waste of time so don’t bother.
This is just ridiculous. Why? Without having a college financial aid form on file, your student will not be eligible for subsidized student loans or private loans offering more generous rate and repayment terms than unsecured personal loans available through a private lender. Without a completed FAFSA or PROFILE form, your student can’t be considered for any types of school-based grants and even some scholarships offered at the school or department level.
Telling someone to not waste time filling out a financial aid form is like telling someone to skip filing a tax return just because you don’t expect to get a refund. It doesn’t work that way with the IRS and it’s no different when it comes to college.
Most people confuse filing a form with planning. When you step into your tax preparer’s office (or lock yourself away with TurboTax to do it yourself) on April 15, there really isn’t much you can do about tax planning at that stage. You’re just filling in the blanks on the form recording history. The same goes for college financial aid.
If you’re waiting until your child is about ready to graduate from college to fill out a form and expect that you’ll be positioned to rake in the big bucks, you’d be wrong.
Sure, you may have a high six-figure income or assets in the bank or own a business with positive cash flow. But just because you may not qualify for ‘free’ money doesn’t mean you can’t save on the cost of college.
The time to do tax planning is long before you file your taxes. The time to do college financial aid planning is also best done before winter break of your kid’s senior year of high school. The earlier you start the better prepared you’ll be.
No, not everyone gets ‘free’ money but by planning ahead you can implement certain strategies that can lower your reported income, lower your income tax liability, lower your reported assets and ultimately lower your Expected Family Contribution (or EFC).
Why is that important? Well, for one thing, you’ll be able to shop around and find a school that you can actually afford not by looking at the advertised ‘sticker price’ for the cost of attendance but by the type and amount of aid offered at the school.
How do you lower your EFC? There are as many different ways as there are applicants. Each family’s financial situation is different and expecting a guidance counselor or financial aid officer to know or care about how paying for college will impact your cash flow, your credit and your retirement savings is just a pie in the sky hope.
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Some ways include:
- Shifting assets out of the name of the child
- Gifting low-basis assets to your child to take advantage of his lower tax bracket
- Operating a business that generates a loss
- Hiring your kid in your business to shift income to his lower tax bracket
- Avoiding a poorly-timed home equity loan or cash-out refinance that may count against you
In many ways these strategies are designed to maximize the tax code to your benefit.
Here’s an example of the problem: Getting financial aid or tax advice from your boss.
My boss told me when my kids were starting college that filling out the form was a waste of time and that the form went some where and was being used by somebody. If you are employed, financially responsible and saved you will not get anything or at best you only get the ability to borrow money.
Sure. That sounds like great advice. So remember that same advice as April 15 gets closer. Why bother filing that tax return? You weren’t going to get any refunds any way. Were you? Well, you never know. Do you want to take that chance with your investment in your child’s college education?
