Every parent wants what is best for their child, and sending them to college without the stress of financial insecurity is no exception. While there are many different paths a parent can take to prepare for their child’s continuing education costs, there are several preemptive measures that you can implement to avoid the traps that many fall into. Oftentimes, it’s the smallest mistakes that can end up costing the most. Here are six traps to watch out for when preparing to pay for your child’s education.
1. The Confusing Financial Aid Award
The months leading up to the arrival of your child’s acceptance letter and accompanying financial aid award are rife with confusion and anticipation. By now, they have already successfully trundled through the arduous process of completing aptitude tests, SATs, AP course assessments and applying to the schools of their choice. The last thing you want to contend with at this stage in the game is even more uncertainty and confusion. But for many parents, that’s exactly how they feel when reviewing their child’s award letter.
At first glance, it’s easy to assume that your child’s education costs will be covered in full and that all of the decision-making has been done for you. But taking a proactive step in understanding the award letter could help to ensure that you and your child have made the right choice in deciding which school to attend.
In a typical award letter you will find where the aid is coming from and whether they are grants, scholarships, or loans. But what the award letter may not disclose is which financial firm is providing the money or the loan interest rate. For instance, a Federal Perkins loan will typically have a lower interest rate than a Federal Direct Sub loan. Knowing the differences between the two could save you hundreds, or even thousands, of dollars in the long-term.
2. The Fear of High Prices
Most families will shy away from applying to private schools simply based on the advertised sticker price. While actual costs vary by school, it’s not uncommon for the yearly price of these schools to run upwards of sixty thousand dollars. Initially, you may be tempted to simply scoff at the ludicrousness of these prices before completely knocking them off your radar. But before you dismiss these expensive schools outright, it’s a good idea to keep this general rule in mind: What you see on the sticker price is not necessarily what you are going to pay out of pocket.
Think of the cost of college like any other day-to-day consumer transaction. Now imagine that you are shopping at a premier clothing store. In the front of the store you find the new arrivals on display, which are of course trendy and stylish, and possibly out of your budget. But being the savvy shopper that you are, you know that tucked away in the far reaches of the store, behind the chic mannequins and fitting rooms, suspiciously close to the restrooms, you’ll find the sale rack. There you’ll be able to shop for the same quality clothing bearing the same brand logo, the only difference being instead of paying $70 for that pair of shorts, you will find them marked down to $25.
More than likely, you already compare-shop at your favorite department stores, so why not do the same when deciding with your child which school to attend?
This lower price, in terms of college expenses, is what is known as the net price, or the total spent after subtracting financial aid, travel expenses and other variables such as room and board costs. It may seem obvious, but splitting the rent with multiple roommates will cost your child much less than the student renting their Manhattan luxury studio apartment. How much you’re willing to pay for your child’s “experience” outside of the classroom is entirely up to you.
Still not sure which school is offering you the best deal? Check out this handy financial aid award comparison calculator to help parcel out the costs that will be covered by grants and scholarships from what you will owe.
3. Withdrawing from Retirement to Help Defray Expenses
Many parents believe that the only way they can afford to pay for their child’s college education is to withdraw money from their retirement accounts. While this may seem like a viable option, it’s important to first consider the consequences:
You will have to pay taxes on all the money pulled out of your retirement fund since it will be considered taxable income. The percentage will be dependent on your income tax bracket, which may be affected by the surplus of funds from the withdrawal.
When you withdraw from your IRA, money that was previously not counted as assets in financial aid calculations can suddenly negatively affect the amount of aid you receive because it is now counted as income.
You will have less money in your accounts to generate wealth for your retirement. Ask yourself: Is trading my future financial stability in exchange for my child’s college education a sound decision? Are there alternative sources from which I can draw from?
When factoring these risks into your decision, the damage of withdrawing money from your retirement funds can be far worse than taking out federal loans. If, for whatever reason, you must withdraw from your retirement, consider doing so from a traditional IRA or Roth IRA instead, as you will not be penalized with the 10 percent premature distribution tax since the money will be used to cover the cost of tuition.
4. The Dangers of Procrastination
Life has a tendency of getting in the way of what’s most important. Don’t let this be the case when it comes to filling out the FASFA. It’s easy to delay the process, but the penalty for such delays could result in missing out on financial assistance programs and cancel your eligibility to receive certain financial aid packages distributed at the federal and institutional level.
Beginning October 2016, a student can submit their completed FASFA as early as October 1 of their senior year in high school, using information found on their (or their parent’s) tax return from the previous year. If you have any concerns regarding the completion of the FASFA then it is important to seek out the advice of a financial planner to guide through the process.
5. Just Because You Need It Doesn’t Mean They’ll Give It
As you know, financial need is determined by the cost of attendance for a particular school minus the estimated family contribution (EFC). Some schools will provide assistance to cover the difference entirely; others may only provide partial assistance. It’s important to note that a cheaper school that covers only 70% of need could be more expensive overall than a higher priced school that covers 100% (see number 2 from this list).
Bear in mind, your home mortgage, consumer debt, and other financial liabilities do not have any bearing on the amount of money you are expected to contribute to your child’s education. Don’t let these burdens become a roadblock to your child’s future success.
6. Fixed Financial Aid Packages
There is a high probability that your financial circumstances will fluctuate to a varying degree during the years your child is enrolled in college. The loss of a job, the purchase of a new house or car, an unexpected family medical emergency, a downturn in the stock market; although these major life events are entirely out of your control, any one of them could have a damaging effect on your finances. As you navigate the vicissitudes of life, you may find yourself in need of more financial assistance from the school. Most people assume that as their financial need increases, their aid package will be adjusted accordingly. Unfortunately, this is not always the case.
In fact, some schools will not adjust your package for any reason, including the loss of a job, after your child’s first year of college. On the flip side of this issue, some schools will promise a certain amount of aid in grants and scholarships but only for the first year of school. This tactic may sound familiar, as many cable companies have used a similar concept by marketing a great offer for the first twelve months before sweeping the rug out from under your feet and charging excessive fees.
The best advice is to read the fine print in the award letter, or better yet, contact the school directly before enrollment. This is especially important if you anticipate a dramatic shift in your income in the future. You don’t want to discover half-way through your child’s education that you can no longer afford to pay for it.