Loading ...Here are some misconceptions about college financing that could lead you astray.
Misconception #1: Our income is too high to qualify for financial aid. A recent article published in The Wall Street Journal, stated that families earning six-figures can now potentially qualify for financial aid. Therefore, families should fill out the financial aid application form to whether they are eligible for low-interest loans, campus jobs, and grants.
Misconception #2: I have better chances to qualify for financial aid if I have saved less money for college. Many factors are involved with the calculation for financial aid eligibility. The amount of money saved for college plays a small role in this calculation and may not affect your chances for financial aid. Other considerations such as household income, mortgage debt, the number of family members in college and the closer to retirement the older parent is play an important role in determining financial aid eligibility.
Misconception #3: Financial aid is more difficult to obtain when a student is the beneficiary of a 529 plan. First, the 529 plan is in the name of the account owner and not of the beneficiary. Non-retirement parental assets account for only 2.67% to 5.6% of the financial resources taken into consideration in the financial aid eligibility formula so the savings from a 529 plan have minimal impact. Furthermore, if the account owner is someone other than the parent, for example a grandparent, that money is not even taken into consideration when calculating financial aid eligibility. Also, grandparents planning for estate purposes might beneficiate by contributing in a 529 plan due to the fact that such a plan is not counted as assets for estate tax purposes. Individuals can gift up to $60,000 per year for each beneficiary without having to pay a gift tax.
Misconception #4: College is too soon and it’s too late to save. Even if you haven’t saved for your child first year of college it’s not too late to start saving for their second, third and fourth year. Also, every penny saved is money that you won’t have to borrow in the future. Make it a habit just as you stop to buy coffee in the morning, put some money aside for your child’s education weekly or biweekly.
Misconception #5: I can use my retirement money to pay for college. Using your retirement savings is not a wise move given that first, retirement cost more than college education. Second, drawing from your qualified plan will increase your taxable income which is an important part of financial aid eligibility calculation. Third, you may incur a penalty for early withdrawal from your qualified plan. Fourth, it puts your comfortable retirement in jeopardy. As we previously mentioned, making continual contributions into a 529 plan can make a difference. Consider setting up automatic contributions directly from your bank account into a dedicated college savings account. This will not affect your retirement or your child’s education.