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Stop Committing these Money Mistakes to Keep Your Child’s Financial Aid


Many parents think they can stop paying attention to their child’s financial aid after they have gone to college. However, this only applies to the first year. This means you may need to reapply your child for financial aid every year until he or she graduates. Stop committing these money decision mistakes which can break your financial aid package in this crucial period in your and your family’s life.

Bad Timing in Getting Help From Grandparents

Seeking financial assistance from your grandparents may be a good idea to aid your child’s education, but if they give the assistance at the wrong time, this can put a dent in your aid package according to financial experts. For example, if one grandparent offers a $10,000 assistance to the child using their 529 college savings accounts, the college institution they’re in will count the money as student income.

This prompts the colleges to think a student can afford to support his or her studies, causing them to cut the student’s aid. The savingforcollege.com’s publisher and director Mark Kantrowitz recommends that grandparents wait for a while before giving assistance to the child.

According to Mark Kantrowitz, a child’s income bears more than the parent’s assets or income, so one has to be very careful in giving student assistance.

He also adds that when a student is in his or her sophomore year already, most colleges stop scrutinizing the family’s income. This means that your grandparents can give assistance to their grandchildren from their 529 college savings plans without cutting your aid. However, be wary since this might become a hindrance if the student has a 5-year course.

If possible, the financial aid consultant named Kalman Chany also recommends that grandparents should wait until their children graduates to offer their financial assistance and help them pay for their student loans instead.

Too Much Gain

Most parents cash out their retirement funds or investments to pay for their child’s college tuition. While this is a good technique to help fund your child’s education without draining your budget, this can be a costly mistake especially if the calendar crossed January 1 of the student’s 10th-grade year. According to financial experts, any capital gains coming from an investment will be hit with tax returns used in the FAFSA or Free Application for Student Aid.

Any gains acquired can be a basis to reduce your child’s financial aid. Chany suggested selling your losing investments to offset your gains instead. If it’s not possible, then you need to hold on to your investments first and borrow money to pay for your child’s education for the first two years of his or her college. Then, sell your investments during their junior or senior years as it will not influence nor cut their aid package.

Taking a Second Mortgage

According to Chany, some colleges list a house property as a parent’s asset, so reducing its equity stake can boost your child’s aid package.

Many parents think they can finance their child’s college education if they cash out their house or property’s equity with a second mortgage. But financial experts advise against doing it. According to them, you may find yourself paying for holding on a large amount of cash in your bank account.

Aside from that, you’ll be trapped paying the interest rates associated with the mortgage loan. Chany recommends you use a home equity line of credit instead. In this way, you can only withdraw the money when you need it and pay your child’s tuition fee. Your money will not just sit on your balance sheet. Ironically, taking your house’s equity makes your child more eligible for more aid, since this is one of the packages in some state colleges and universities.

Raiding Your Retirement Account

Although parents won’t be penalized if they use their traditional IRA account to pay for college, you may have to face paying a hefty amount of taxes if you take it out as income. This type of aid causes the IRS to add your taxable income, so colleges expect you to pay more since you can afford to pay the tuition fee.

Channy recommends you borrow from your 401(k) plan instead to pay your child’s college fees. While it is still a risky move, this cannot hurt your aid as long as you retain your job and can pay back the funds. Otherwise, you’ll face the penalties.

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