It is extremely difficult to find your way through the maze of college financial aid. The following are six turns in the financial aid maze to be aware of:
1. College Financial Aid Award
Once your student is accepted to the colleges and/or universities he is considering, he will receive a financial aid “award” letter from each one. These letters are often confusing and should be carefully analyzed. Because colleges and universities use various sources to fund financial aid packages, you need to understand all aspects of the financial aid offered to your student. In many cases, you will need to inquire of the college or university financial aid officials who are offering the aid to make sure you understand all aspects of the aid offered. For example:
- Grant or loan. You need to determine each line item of your award letter as to whether it is a grant (free money) or a loan.
- Loan. If it is a loan you should get a clear understanding of the terms of that student loan.
- Grant. If it is a grant (free money), you should inquire as to how that money is dispersed.
- Work Study. If work study is offered, make sure to understand how your student actually obtains one of those jobs and how quickly they should apply and where they should apply.
2. Private University versus State College
A lot of folks ignore private universities because of the price of admission. Seeing the $50,000 to $70,000 price tag causes many families and their students to eliminate applying because of the sticker price of attending. The key is not the price tag, but the net cost of attendance and your out of pocket expense. A lot of private schools have more financial aid to offer than state schools and therefore you should not eliminate application to these schools for your student. They could end up being less expensive than a state school.
3. Using Retirement Money
Using your retirement account for your college bound student should be the last place you go to get the money. Pulling money from your retirement accounts can create numerous problems.
- You have to claim the money as income. This will affect your FAFSA calculations and decreases the amount of potential aid by increasing your EFC (expected family contribution) for the following year.
- It creates additional taxes and penalties by taking a withdrawal. If the money you are withdrawing is coming from a 401K or 403B, most of these plans have a loan privilege. However, the maximum loan you can get is usually 50% of the balance up to a maximum of $50,000.
- The interest you pay on the loan is also not tax deductible.
- How the interest is added to your 401K account and is taxed later when dispersed in retirement can present a challenge.
Using your retirement money is usually a more expensive way to borrow than taking out good student loans.
4. Don’t wait to fill out aid forms
Another pitfall is waiting too long. Waiting too long to fill out the required aid forms (FAFSA or CSS Profile) could cause you to be in the back of the financial aid line. Schools will usually offer their aid on a first come, first serve basis. When they run out of money to give and you are last in line, you won’t get any ! Become aware of the various deadlines and be proactive to get it done early. Don’t Procrastinate!
5. Need Expectations
Your “need” is not always fulfilled. Universities and colleges will not treat you the same. Just because your financial need is “X” does not mean you will get 100% of “X”. Those schools and those awards are limited in number. That is why you should have your students apply to numerous schools, especially schools that match their desired course of study and that have the most money to give.
6. Filing the FAFSA every year
Even though you have to fill out the FAFSA every year which ultimately changes your “need”, some schools will not adjust your aid package accordingly. Find out ahead of time if the school your student plans on attending will adjust the financial aid award if your need should increase in the future.
Working through these issues can be time consuming at best, however reaching your student’s third year of college and realizing you have run out of money can hurt.