Financial Aid Myths You May Have Heard and Need to Clear Up
There’s no way around it, college is a big expense—one of the largest outlays families face in addition to their home purchase.
However, you can ease the burden of paying for college, slightly or significantly, if you can better leverage financial aid.
Yes, understanding financial aid can be challenging – it is a complex subject. More problematic though, unfortunately there are a lot of myths surrounding financial aid and FAFSA, which may cause you to miss out on more money for college.
Here are 8 financial aid myths to clear up so you can keep the door open to more aid and reduce your college costs.
Myth #1: There Isn’t Much Financial Aid Available for College Students
One of the common assumptions about financial aid for college is that it’s not widely available. You might be thinking, sure, some kids get it, but the average person won’t have much hope applying for financial aid. This couldn’t be further from the truth.
Every year, billions of dollars go out in financial aid for college students. The largest sources of aid dollars are the federal government and higher education institutions.
In recent years approximately 85% of full-time undergraduates received financial aid.
If you were thinking that financial aid is for a limited few, think again!
Myth #2: Only Straight-A Students Get Aid
Another misconception people have about financial aid is it’s only for very gifted or Straight-A students.
It’s true that academic achievements can definitely help students earn merit aid. However, merit aid can be awarded for non-academic activities, such as leadership, artistic talents, volunteerism, sports and more.
Many private institutions offer generous merit aid that reduces their higher price tags. One of the main reasons for this is to help drive higher enrollment.
While Ivy League and other elite schools garner more applications than ever, the reality is that most schools have a harder time filling their freshman classes each year, so they offer merit aid (or tuition breaks or discounts) to attract and retain more students.
Myth #3: Your Household Income Is Too High for Aid
One of the biggest financial aid myths is that aid is only available for low-income households.
While need-based financial aid is determined based on family income, merit-based aid is not. Merit aid is gift aid that students can earn for their academic achievements and much more (see myth #2.) Schools are the number one source for merit aid and nearly 90% of students at private colleges and universities are receiving financial aid.
Also keep in mind, the financial aid calculation is not one-size fits all. Schools gather multiple data points in determining financial need, including family size and number of a family’s kids in college simultaneously.
And, given such high cost of attendance at some schools, approaching $80k per year and more, need-based aid encompasses families across a greater income spectrum.
Myth #4: You Only Have to Fill Out the FAFSA Once
If you’re seeking federal financial aid, which includes grants, work study and student loans, then you’ll need to fill out the FAFSA. This is a financial aid application that determines a student’s eligibility for need-based aid. Many schools also require completion of the form in order to access their merit-based aid.
What a lot of people don’t realize is that the FAFSA needs to be submitted for each year of college.
If you don’t fill out and submit the form each year, you will miss out on the aid you might otherwise be eligible to receive. Fortunately, filling out the form may be simpler after the first time you do it as some of your information will be pre-populated.
Myth #5: Saving in 529 Accounts Will Eliminate Aid Eligibility
529 College Savings Plans and Prepaid Tuition Plans (as well as Coverdell accounts and UGMA/UTMA accounts) are factored into the Expected Family Contribution calculation for need based financial aid. Because of this, some people assume that a 529 account can compromise qualifying for financial aid.
Technically, 529 accounts can reduce your eligibility, but only slightly. Currently, the maximum amount that’s counted is 5.64% of the total money saved in parent held accounts. So, for every $10,000 in parent held college savings accounts, aid eligibility drops approximately $564. (Assets held in the student’s name reduce aid eligibility significantly more.)
Myth #6: All Savings and Investment Accounts Will Reduce Aid
Just as with college savings accounts, some people also worry that other savings might impact their chances of qualifying for financial aid.
Federal aid eligibility is not reduced for your qualified retirement account balances, such as 401(K) plans, pension plans and annuities. However, your contributions into these accounts will be counted in your income when determining need-based aid eligibility.
Your non-retirement asset balances, like checking, savings and brokerage accounts, do impact your aid eligibility. For assets held by parents, accounts are assessed 5.64% of the account value. So, for every $10,000 in these accounts, aid drops by approximately $564.
Myth #7: Your Home Value or Equity Will Reduce Aid
A big worry for homeowners is that they won’t qualify for aid because of the market value of their home.
Your home’s market value or your home equity for your primary residence is not included in the determination for federal aid.
However, for additional real estate, like second homes or rental properties, your equity is treated as an asset and will reduce need-based aid eligibility.
For families applying to certain private institutions, an additional financial aid form, CSS Profile is required. Some of those schools will include home equity in the eligibility calculation for their institutional aid.
Myth #8: Financial Aid Isn’t Negotiable
The reality is that you may have opportunities to gain better financial aid offers.
While the Covid-19 Pandemic was a catalyst for many families and schools to work together to improve aid offers, even before then, appealing for more financial aid was possible.
You definitely want to re-evaluate aid offers when there has been a change in circumstances such as unemployment or healthcare issues or death of a parent or spouse. Especially since aid eligibility is calculated in part with financial information that is from two years earlier. (FAFSA includes your income from the prior-prior year, so if college for your student starts in Fall 2024, the base year tax information will be from 2022.)
Additionally, if you have competing admissions and aid offers from different schools, you may want to share that information to boost your aid from your preferred school.
Lastly, if a financial aid award includes student loan amounts that are too high for your comfort, you don’t have to accept them as part of the aid award. You can also ask for help from the school to replace the loans with other gift aid.
Visit a school’s website to learn more about how to appeal financial aid awards.
Financial Aid to Reduce Your College Costs
For families interested in lowering their college costs, just focusing on getting into college is not enough, maximizing aid opportunities is key to the process.
Financial aid for college isn’t just for a select few. A majority of students and their families rely on financial aid to help with paying for college. And, colleges are the primary source of student aid dollars today.
There is much to learn and understand about how financial aid really works; the terminology, the financial data and FAFSA just to name a few things. However, don’t let financial aid myths or assumptions get in your way.
Stick with the facts about financial aid so you can make college more affordable for your family.
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