“Important Money Decisions That
Can Dramatically Affect Both
Aid Eligibility And Family Finances”
As the academic year drags on it can seem unending to students who find themselves in a seemingly endless cycle of tests and quizzes and papers and projects. The purpose of all this work, at least for those forward-thinking students who have an eye firmly fixed toward attending college or university after graduation, is naturally to continue the educational experience at the next level. However, there is a lot more knowledge that is needed to optimize this opportunity than just the class work they are completing in high school.
As college funding professionals, when it comes to fully preparing for a child’s higher education – starting with applications and admissions processes, all the way down to the details of financial preparation for the college years – we are duty-bound to remind families of the best ways to focus on both ends of this process.
Honing in on the financial aspect of college preparation involved a significant amount of different types of planning. Families who fail to do so, whether it is because they are unfamiliar with the process, or because they simply did not get around to it, will usually end up costing themselves a significant amount of money and stress in the long run. Because of this, we take our work extremely seriously.
Because the completion of a degree is a vital springboard to a young person’s success, we deem it important to help families understand the overall consequences of their financial decisions in the years leading up to high school graduation and college. You see, there are a lot of potential mistakes that families can make during the high school years that would not seem like a problem at all – UNTIL they are viewed through the lens of college financial aid and preparation! Then, suddenly, a seemingly benign financial decision can have some quite significant consequences, indeed.
With this in mind, we are using this month’s newsletter to focus on some of the more important financial decisions that can have an effect on college aid eligibility and family finances throughout the years of higher education. Remember that circumstances can vary somewhat from family to family, based on income, family size, and other considerations, so the best thing to do when reviewing money decisions in the high school years can often be to discuss them with an expert on college funding.
1. FAFSA Filing and Income Tax Return
Many people assume that one cannot file the Free Application for Federal Student Aid (FAFSA) without having first completed their income tax form. This is not the case. One is able to estimate their taxes so they are able to compete and file the FAFSA. It is actually very important to file the form as soon as possible because aid eligibility is determined on a first come, first served basis. One has the opportunity to update the tax details on the application as soon as the tax return has been fully completed.
2. Remarrying and Its Consequences on Aid
Single parents who plan on having their son or daughter having a high eligibility for aid for school may be in for a big surprise if they marry shortly before their child applies for college. The income for the new spouse will now be taken into consideration even if the plan was that the new spouse would not assume any financial responsibility for the child.
According to the Higher Education Act that came into effect in 1965, parents who have remarried must include the income of their newly married spouse and that income will be factored into the aid eligibility of the child. Not being aware of this law if a parent is counting on receiving a lot of aid may come as a shock. This is important to know and may help when making decisions about timing for big events.
3. NOT Applying For Aid (Because You Think You Won’t Be Eligible)
If you are one of the fortunate folks who are financially stable and secure, that is wonderful! The thing that you might not be aware of, however, is that your child may still be eligible for financial aid during the college years. This may only be an unsubsidized Stafford loan but this can make much more financial sense than any private loan, most of which are often loaded with more risk and higher interest rates.
4. NOT Listing Extenuating Circumstances
Life is nothing if not unpredictable, and the unforeseen can happen at any time. Someone in the family could have an accident. Or you could experience the death of a loved one. The loss of a job could be both emotionally and financially devastating. Many families who are hit by difficult circumstances feel embarrassed or unwilling to share details with their child’s future university. The important thing to know is that colleges are not staffed with insensitive robots who do not have any feelings or consideration for others.
If there have been extenuating circumstances that have occurred in your family, it is important to strongly consider sharing them with the college financial aid officer. In light of the new information, the school may want to reconsider or adjust your child’s aid package – after all, they are also vested in having their student body attend and graduate. Should you need assistance with the best way to manage this communication with an institution, a college funding advisor will certainly be able to help.
5. Buying a Vacation Home
If you are planning on buying a vacation home or other similar property, you may want to consider waiting just a few years until after college. This is because making such a purchase at the wrong time could adversely impact your child’s financial aid eligibility. Colleges will frequently look at recent purchases, like an additional vacation home, as “extra liquid assets.” This could severely affect the amount of money that your child could be eligible to receive, so it is important to make these kinds of major purchases on the proper timeline.
6. Taking Out an Equity Loan
Taking out an equity loan may seem like the right choice in the short term, but this could have a deleterious effect on your child’s ability to receive funds. Regardless of where the money comes from, these extra funds will appear to the financial aid officers as if there’s a substantial amount of cash ‘lying around’ and your child could be penalized for it as a result. This happens if the funds are taken out in a lump sum and added to the checking account. If you want to take out an equity loan, you could consider an equity line of credit – which is more akin to a credit card.
7. Managing Grandma’s Loan/Gift
Grandmas and Grandpas are wonderful. They have been known to do special and meaningful things for their grandchildren, such as providing sums of cash to help assist with college expenses. These gifts of cash, however, can have a detrimental effect on loan eligibility – especially if given at the wrong time. Unfortunately, depending on the circumstances, gifts from family members can make it substantially more difficult to receive aid.
However, if the grandparent decides to loan funds for college, they can usually do so without creating difficulties. They cannot, however, simply ‘call’ it a loan. It must be an official loan and they will need to charge current market interest rates on the loan. These funds, also, must be spent prior to the signing of the loan application. Failing to do so would result in the funds being included as an asset belonging to the student. This can be a complicated circumstance, and a college funding advisor can be extremely helpful in determining how to proceed with the generosity of relatives!
8. Including Retirement Assets
The FAFSA form will ask for the net worth of investments. They do not need to know about the assets in IRAs (Individual Retirement Accounts), 401(k), 403(b) or other pension plans. Parents who list these assets not understanding that this information is not required could seriously damage their child’s chances for receiving ‘need-’based’ financial aid funds.
9. Including Home Equity
The home equity on your primary residence is not a requirement on the FAFSA as a declaration of assets. If parents do include this information on the form this could seriously affect the ability of a student to receive needed aid. However, there are some schools (around 200) – mainly private institutions – that will ask for such information on their institutional aid forms. For this reason, it is best to do the research on the particular schools that your child will be applying to and then you can decide how to move forward. Once again, a college funding advisor can be a godsend in these kinds of circumstances.
As you can see, there are a number of considerations that can play a role in properly preparing for the college years with regard to family finances. If you would like some personal assistance in that regard, especially with consideration of your individual circumstances, we would be happy to help however we can.
Until next month,