Junaid Raza Syed (Senior Editor/Department Manager FS)
If your child received financial aid in their first year of college, congratulations! However, you’re going to have to continue putting in effort and filing applications in order to keep the financial aid for the next three years of college.
Families are generally required to reapply for financial aid for each year that their child spends in college but most applications are denied because of bad financial decisions people make during this crucial period. Here are the top four mistakes that could potentially cost you your financial aid package.
Help From Grandparents
There’s obviously nothing wrong with your grandparents offering a little help with college and household expenses, but if it’s almost time to reapply for financial aid, any assistance you receive from your grandparents could hurt your chances of being accepted for an aid package.
For example, if you receive $10,000 from your grandparents’ 529 college savings account, it could technically be counted as student income. Any income in the student’s name has a more significant impact on the aid than parental assets.
The best advice for grandparents in this scenario, according to Mark Kantrowitz from savingforcollege.com, is to wait until the grandchild has completed their sophomore year.
This is when colleges stop investigating into students’ family incomes. After sophomore year, grandparents should be able to send their grandchild money without a problem unless the student spends more than four years in college. It is also wise for grandparents to wait until graduation to pay off student loans.
Too much gain
If you’ve been cashing out on your investments to fund your child’s education, you might want to stop doing this once they cross their tenth grade year and it’s time to apply for college. Once the calendar crosses January 1, cashing out on investment can become a costly mistake.
If you’ve made any capital gain in the first tax return would show up on the Free Application for Student Aid (FAFSA) and hurt your child’s chances of getting student aid. A great solution to this is to sell investments that are making losses in order to offset the gains.
Experts suggest taking loans instead of selling investment until sophomore year as the best option to fund college without hurting your investment portfolio.
Second Mortgage
Most parents who don’t have adequate funds for their child’s education rely on their home equity by taking out a second mortgage, which is generally a bad idea. If you take the second mortgage route, you’ll face consequences like high interest on loans as well risk of stashing large amounts of cash in your bank account.
One expert says that using a home equity line of credit is a much better solution because this way you’ll only take the money you need to cover tuition costs and the rest won’t show on your balance sheet.
In some cases, taking a second mortgage may boost your chances of getting a bigger financial aid package because schools often count your house as an asset when allocating the aid amount. If you take money out of your house, you’re technically slashing your equity in the property so you’re more likely to keep the financial aid throughout college.
Withdrawing from Retirement Accounts
Although you won’t have to pay any penalty fees if you withdraw money from a traditional IRA account to pay for college, you will be penalized if you used the withdrawn funds as income. Not only that, but colleges also count IRA money as taxable income so your child will end up getting less financial aid.
Similarly, funds from a Roth IRA can be used to pay college fee without any penalties or income tax as long as you’re only withdrawing your own contributions, which are pre-taxed. Experts recommend borrowing from a 401(k) instead and using the money to pay college fee. This way your chances of getting a financial aid package will not be affected.
However, there is certainly risk involved in taking money from your retirement account because if you lose your job and aren’t able to return the funds, you could face a heavy penalty. It’s not a good idea in general to take money out of your retirement account for any other purpose except your own retirement.