CHICAGO — Applying for college financial aid can be intimidating. A slew of myths and misconceptions only complicates matters.
Families have to educate themselves about this complex world and stay on top of it. Their homework lasts from the beginning of the college selection process in the junior year of high school through at least the receipt of financial aid packages in the spring of senior year. Colleges don’t spell out everything they need to know, so it’s important to be able to ask informed questions and see past any false assumptions.
Those who avoid the pitfalls can potentially save tens of thousands of dollars. But if they’re not diligent, parents can set back their finances and even their retirement prospects.
“The families that are most likely to fall prey to the myths are the ones not looking for information about them,” says Mark Kantrowitz, publisher of the FastWeb and FinAid websites about college aid.
Here’s a look at 10 common financial aid myths and the truths behind them:
1. Savings hurt opportunities for financial aid.
There’s only a slight penalty for savings.
The formula that colleges use as a guideline for setting awards calls for parents to contribute a maximum 5.64 percent of their assets per year toward the cost of college. (If the amount is in the student’s name, he or she is expected to contribute 20 percent.) And parents can shield a significant amount of savings from that calculation — typically about $50,000 but with slightly higher allotments for older parents. If the older parent is 50, for example, the family can shield the first $52,900 of assets. If 55, it’s $60,200.
Assuming that savings penalizes more than helps is “dead wrong” in the vast majority of cases, says Lynn O’Shaughnessy, a personal finance journalist and author of “The College Solution: A Guide for Everyone Looking for the Right School at the Right Price.”
2. Our income is too high to qualify for financial aid.
Household income is the single most important factor in the aid equation but not the only one. Even families making more than $150,000 a year can qualify for need-based aid.
Other factors that may entitle reasonably well-off families to aid are a larger family size, more than one child in college, heavy unreimbursed medical expenses, impending job loss or divorce.
3. Having a lot in retirement accounts and home equity means little or no aid.
Money held in most retirement accounts isn’t counted against you.
Federal and state financial aid guidelines don’t consider home equity, either. It only matters if you are seeking aid from one of the more than 200 select colleges and universities that use the College Board’s CSS/Financial Aid Profile. Even with that pricey group, it won’t keep most families from qualifying.
4. Only top athletes, poor or straight-A students get aid.
Most scholarships are awarded based on other criteria besides athletics. And more than two-thirds of all families qualify for some form of financial aid, according to Kantrowitz.
Middle-income students are likelier to win scholarships than lower-income students. Nearly 14 percent of students with family incomes of $50,000 to $100,000 were awarded scholarships to four-year colleges in 2007-08, according to Kantrowitz, as did 10.8 percent of students with family incomes of more than $100,000. The percentage for those with family incomes less than $50,000 was 10.6 percent.
Brilliant students don’t win all the academic scholarships, either. B students receive some, depending on the school, as do many students with financial need. Plus there are plenty of private scholarships based on community service, leadership and extracurricular activities.
5. Applying for financial aid will hurt chances of admission.
Most colleges practice need-blind admissions, Kantrowitz notes. That means they accept students without considering their ability to pay. Colleges then try to offer enough aid to meet the student’s full financial need, based on data submitted via the Free Application for Federal Student Aid (FAFSA).
College admissions officers generally work independently of the financial aid office.
6. The big, prestigious colleges give more aid.
This varies widely. Some colleges with relatively small endowments still give significant financial aid awards. And they may offer more generous grants in order to attract top-level students who otherwise would go elsewhere.
It’s best to work closely with a school’s admissions and financial aid departments to determine what may be available. You can also get an idea how much merit aid to expect from a college by searching through its Common Data Set. These statistics are provided on a university’s website and include useful information about admissions and financial aid awards.
7. State schools are always cheaper.
Your state university likely has a significantly lower price tag than most private schools. But a lower sticker price doesn’t necessarily mean a lower out-of-pocket cost, especially because many private schools offer significant aid awards.
O’Shaughnessy cites the example of a California student who’s paying $7,000 a year to attend an elite college with a listed total cost of attendance of about $53,000. The student received a great financial aid package because his father is unemployed, and the family mortgage was underwater. In this case it would have cost the student far more to attend the University of California.
8. Going deep into debt to pay for college is unavoidable.
It’s true that few families can afford college without taking on some debt. Only a third of 2008 college graduates did so debt-free, according to FinAid. Their average student loan debt was $23,186.
Many college experts say it’s OK to borrow as long as your debt doesn’t exceed your expected starting salary at your first job out of college.
9. Loans are not a form of financial aid.
When colleges provide financial aid, it’s important to know that they’re referring to more than just grants and scholarships. Otherwise it may come as a shock when an aid package arrives. The letter may say “Congratulations, we’re offering you $25,000 a year in financial aid.” But that might be a $20,000 loan, $3,000 for a work-study job and only minimal “free money.”
10. A financial aid award is always final.
Private colleges increasingly will bump up the amount offered in their financial aid packages. It’s a practice designed to help recruit mostly top students, especially those with better offers in hand. Few colleges discuss this openly, however, or disclose how many financial aid awards are successfully appealed. Carnegie Mellon University in Pittsburgh is a rare exception, stating on its website that it’s open to reconsidering aid amounts based on a student’s awards from competing institutions. It even has a form to request a financial aid review.