4 Stubborn Financial Aid Myths

Many of the misconceptions that people possess about the college process revolve around financial aid. So with the college admission season heading into high gear, I am sharing the four financial aid myths that are probably the most common.

Myth No. 1:  I make too much money to qualify for aid.

You shouldn’t automatically assume that you won’t qualify for need-based assistance. How much income you earn is only one part of the equation. What also matters is the price of a particular college. For example, some families that don’t qualify for financial aid at moderately priced state schools may be in line for considerable help at pricey universities.

You can obtain an early assessment of whether your family might qualify for aid by using the expected family contribution calculator at the College Board. A calculator will produce an estimated Expected Family Contribution, which is what colleges would expect you to pay, at a minimum, for one year of school. Don’t wait until your child is a senior in high school to use this calculator!

Myth No. 2: My home equity will kill my chances for aid.

Most colleges won’t care if you own a house and won’t count home equity against you if you do. That’s because the majority of schools rely on the federal aid application, the Free Application for Federal Student Aid (FAFSA), which doesn’t ask parents if they own a home.

Colleges that use an additional form, the CSS/Financial Aid PROFILE , will ask about a family’s home equity. Here is the list of the colleges and universities that use the PROFILE.

Many colleges will limit the amount of home equity they consider when they evaluate a family’s ability to pay. Colleges will typically impose a cap that rarely exceeds 2.4 times a family’s income, according to Paula Bishop, a CPA in Bellevue, Wash. who assists families with financial aid issues.

How a college will treat a family’s home equity will sometimes depend on how interested the school is in an applicant.

If you want to see how a school treats home equity, use the institution’s net price calculator. I wrote a post this summer that explains how one dad used net price calculators for about two dozen schools that determined how each school assessed home equity. Here is that college blog post:

Will Your Home Equity Hurt Your Chances for Financial Aid?

Myth No. 3: I have saved too much in my child’s college fund to qualify for aid.

In reality, few American families who apply for financial aid are penalized for their savings. Here is a post that I wrote about this myth: Why Saving for College Won’t Hurt Your Chances for Financial Aid

Families who file the FAFSA automatically receive an asset protection allowance based on the age of the oldest parent. The closer you are to retirement, the larger the allowance. A 55-year-old parent, for instance, has an asset allowance of $53,400. Here is the latest chart from the federal government:

Myth No. 4: Completing financial aid forms is a waste of time.

Most families should complete financial aid applications, because without filing these documents, they will have no hope of receiving need-based aid. What’s more, there children won’t be able to borrow through federal student loans.

The FAFSA will become available on January 1 for the 2013-2014 school year. The application should not take long if you gather the necessary documents before you sit down at your computer. You can find out what information you’ll need to complete the FAFSA by checking out the FAFSA on the Web Worksheet.

The latest PROFILE is available every fall. While the FAFSA is free, the PROFILE costs $25 for the initial application and college report, and all additional reports are $16 each. Some low-income families will be eligible for fee waiver.

Lynn O’Shaughnessy is the author of The College Solution: A Guide for Everyone Looking for the Right School at the Right Price.

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  1. If my spouse is not employed, does that hurt or help us when colleges look at our financial need? (As the husband of a married couple, I am the primary wage earner, and my wife has a 23 hour a week min wage job) I ask because when we ran 2 scenarios through the college net price calculator for a certain college, the calculator projected more aid with her min wage job active, versus entering her as a no income spouse. Does this make sense?

  2. What happens in the case of divoreced/seperated parents? I am remarried and work part time, my husband makes decent money, my sons father is living paycheck to paycheck with no savings or other assets. Since my name is on my husbands bank accounts, does the money in there affect college financial aid for my son? Leaving my spouse to foot more of the bill than his own father? Is it better to make sure we have seperate bank accounts for our earnings?

  3. So, WHEN could rentals be considered a business? Like some posters here, we’ve had no money to contribute to a 401K. We’ve done alot of sweat equity on the homes. I spend about 15-20 hours per week working on the rentals, acting as a “social counselor” to many of the tenants, especially their children, and much more. If I am forced to sell my rentals then I end up with less (or no) income. So, it sounds like “double dipping”…in the sense that it is being counted first as an asset and then as income (from the asset). We have all the rentals in a business name (but not the mortgage because then we couldn’t get funding), a registered business name, a business checking account through which all money has flowed, etc.

  4. Exactly Sharon! A couple we know of are retiring at age 50 from a CA government agency. They each will get 150,000 per year for pension. Their kids will have no problem- and they can expect 300,000 a year for life (ironically they are moving to a different no state tax – state).

    1. Their $150,000 yearly pension income will be counted as income as if it were a salary. I know because I have a defined benefit contribution and my pension payments are expected to be tapped to fund my daughter’s education, as they should be.

      1. But there appears to be a significant inequity here for CSS Profile filers. I don’t have a defined benefit pension plan, so to save for retirement, I must contribute a hefty sum to my 401K plan. Families that know they will have significant DB income when they retire (i.e. 2 married teachers), they don’t have the same urgency to save in their 403b as I do. If I don’t save in my 401K, I can’t retire. If they don’t save in their 403B, they can still count on their pensions.
        My oldest is going to college in 2014, so I haven’t completed the profile yet, but I would love to hear how this discrepancy is addressed on the form. On the surface, it seems ridiculously unfair!!

  5. I too have wondered about the issue Julie and Denise raise. If a family doesn’t have access to a defined-benefit pension and relies on a 401K, there might not be enough in the 401K to provide adequately for retirement. In such a situation the family might try to save beyond the 401K, perhaps putting the extra money in taxable accounts or purchasing a rental property. That family is thinking of the taxable account or the rental property as part of their pension and not to be touched for anything else, yet in the college’s eyes, it’s available for college expenses.

    My question: Do colleges count private and public employees’ defined-benefit pensions as financial assets that can be tapped to pay for college?

    1. Hi Sharon,

      In addition to 401(k) plans, parents can save through Individual Retirement Accounts. Schools don’t count pensions. The financial aid formula will count pensions only when a parent starts drawing on the pension. The checks will count as income.

      Lynn O’Shaughnessy

  6. The EFC calculators has indicated we pay 100 percent — can you give me any reason to fill out the fafsa?

    Also this is our sole business. My husband has had a real estate license since the early eighties. Can you tell me if this would make any difference?

  7. I have a friend who suffered from the rental property issue. Over several decades, she and her husband did not have access to 401(k) accounts in their jobs, so they bought rental property, amassing enough equity to eventually fund their retirements.

    However, when their son applied to a high-priced private university, that rental equity was treated like cash in their pockets — not as retirement funds.

    Even though, in their case, rental property had been their best investment choice, its treatment during the financial aid review was an eye-opener.

  8. Lynn,

    Could you talk about the situation for the many people that may be in the rental property business? What if your (low) income is from the rent and management of property and you are funding your pension that way too? Does it even make sense to fill out the Fafsa in that circumstance?

    In “myth 3” the 70,000 you can keep at age 65 would not take you far in retirement.
    Any thoughts or ideas?

    1. Hi Julie,

      Thanks for bringing up your question about the asset allowance. I added a couple of sentences in my post to clarify. The asset allowance is only for taxable assets, as well as 529 plans. Retirement assets are not counted at all in financial aid calculations.

      Rental property will count in the aid calculations. You should use a EFC calculator, as well as net price calculators to see what impact your rental property would have. I devote an entire chapter of my book, The College Solution, to explaining net price calculators. You can also get an explanation in this post: http://www.cbsnews.com/8301-505145_162-57459674/how-to-find-out-what-college-will-really-cost-you/?tag=contentMain;contentBody

      Good luck.

      Lynn O’Shaughnessy