When families look at paying for college, they find a dizzying variety of options. What’s the best way to save for college? How much do they actually need to budget? What does the Free Application for Student Financial Aid (FAFSA) have to do with the amount of aid for which their child qualifies? If they complete the FAFSA, do they still need to complete a CSS Profile? Are 529 plans a good idea?
When parents don’t have the right information, it can cost them and their student far into the future. Here are some of the most common mistakes people make when paying for college.
Not Applying for Aid
The FAFSA is a form college students can fill out every year to learn about the types of financial aid for which they are eligible. Many families don’t fill out the FAFSA because they don’t think they’ll qualify for any type of funding, but almost every student is eligible for some type of financial aid.
A CSS Profile determines eligibility for non-federal aid. It’s a good idea to fill out both applications.
Even if your child doesn’t qualify for need-based aid, he or she might still be offered unsubsidized Stafford loans that can make college more affordable. Family factors, such as how many children you have and other special circumstances may qualify you even if your income is high.
Not Investing in a 529 Plan
A 529 plan lets you invest after-tax funds in mutual funds on your child’s behalf. When they withdraw them, they don’t pay federal taxes as long as funds are used to pay for educational expenses. If your child decides not to go to college or wins scholarships that cover the cost of tuition, you can withdraw the original amount without a tax penalty — you’ll just have to pay taxes on gains.
Aim to save at least a third of what you expect your child to need for college. Over 17 years, your savings goal should equal what a college education costs during their birth year.
Grandparents should not use 529 plans to save for their grandchildren’s college. If they do, withdrawals will be considered untaxed income for the student, leaving them with a hefty tax bill at a time they’re already struggling for money.
Underestimating the True Cost
Housing and food can increase college expenses by thousands of dollars a year. Don’t just use college publications to estimate cost. Research living expenses in the area where your child will be attending school and start to budget.
You may expect that your student will work a part-time job to pay for some expenses, but what if jobs become unavailable or for a time your student is unable to work? Make a plan, and then make a backup plan to avoid surprises.
Approaching Scholarships the Wrong Way
Students often students target only big, highly visible scholarships, thinking they’ll find one to cover all their expenses. The larger awards are more difficult to get, so it’s better to apply for lots of smaller, local scholarships. Start early and apply for even small amounts that add up.