Financial Aid and Financial Aid Myths

Your student may qualify for Financial Aid. Rules governing the calculation of financial aid needs are based upon government regulations designed to ensure fairness in the aid distribution process. But there are a few things you should know which could influence how much financial aid your student may receive. You may be surprised at some of the truths that are revealed:

1. Parents should set savings aside for their child's education in an account under their child's name....
2. It is better for your child to work and save for an education for a few years, and then use those savings to pay for the education....
3. Because a sibling was not eligible for aid last year, the same will hold true for the second child who attends college.
4. Parents who want to pay for their child's education should just bypass regular student aid and apply for a PLUS loan....
5. Parents will not cooperate in the aid application process because their child has reached the "age of majority" and aid will be granted to the child....
6. If the published deadline or priority date for applying has already passed, it is useless to apply for aid because there will be none left.
7. Since the determination of financial aid need is based upon the prior calendar year, drastic changes in circumstances that reduce family income during the year the student is in school will have no effect on the student's eligibility....  
8. Changes in the applicant's/student's family income which generate more financial aid need can only result in increased loan opportunities... 
9. It is better for a student to turn down a need-based College Work Study Program job and work on regular non-need-based employment...
10. If a student gets married, he or she will get better aid as an independent student.

1. MYTH: Parents should set savings aside for their child's education in an account under their child's name. Then when applying for aid, report the funds as student savings rather than parents' savings because student assets are treated more lightly than parents' assets in the analysis of financial need.

REALITY: Parents who save funds for their child's education should keep these funds under their own name (perhaps in a separate account) and include them as part of all cash and savings in the parental section of the aid application. These funds would still be available to help pay college bills as part of the parent's normal contribution, but they would not erode the student's eligibility for aid.

Because the analysis of need recognizes that parents need to set aside funds for retirement, a large portion of parent assets are protected in the analysis, and only a small percentage of any remaining amount is tapped for a contribution toward college expenses. On the other hand, typically none of the student's assets are protected, and a direct contribution is expected in the amount of 35% annually of all reported student assets toward meeting college costs.

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2. MYTH: It is better for your child to work and save for an education for a few years. This way, borrowing can be kept to a minimum.

REALITY: This depends upon the student's eligibility for assistance at the starting point. Many students who choose to work for a few years and attend college later discover that their savings diminish their eligibility for aid. If a student is initially eligible for aid, a better way may be to not postpone the education and work part-time to augment the aid the student is eligible to receive.

If students don't have initial eligibility for aid (presumably because of family financial strength), working for a few years may be the only way to offset the parents' unwillingness or inability to provide financial help.

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3. MYTH: Because a sibling was not eligible for aid last year, the same will hold true for the second child who attends college.

REALITY: This may or not be true. Often there is an overlap when both siblings attend school at the same time, and this has the effect of almost dividing the assessed parental contribution in half for each -- thus each child has a better likelihood of being eligible for aid. This would also hold true if a parent were now attending college (such as night classes). Other factors may involve any downward changes in family income. If the older sibling had a high income or considerable savings, that might be why no eligibility was revealed, whereas the younger sibling might lack this financial strength. Each sibling should apply for aid in order to discover their eligibility.

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4. MYTH: Parents who want to pay for their child's education should just bypass regular student aid and apply for a PLUS loan if they need temporary help meeting expenses.

REALITY: That may sound simple, but it is important not to overlook the advantages of alternative borrowing possibilities. PLUS loans carry a higher interest rate than unsubsidized Stafford student loans, so it would actually be less expensive for the student to take out the unsubsidized Stafford loan (the parent could still make payments to reduce this obligation for the student). Parents may also discover that a home equity loan would be cheaper when considering the income tax break involved. Another possibility would be to borrow against a whole life insurance policy. The interest rate in such policies can be impressively low. Of course, there is always the possibility that the student might have qualified for grant assistance had he or she applied for aid instead of just applying for the PLUS loan. Many colleges are now requiring PLUS borrowers to first apply for aid just to ensure that no better aid is overlooked.

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5. MYTH: Parents can simply say that they will not cooperate in the aid application process because their child has reached the "age of majority" and aid will be granted to the child as an "independent" student.

REALITY: This really won't accomplish anything because the determination of who can be considered independent of their parents is set in law. Unless the student is an orphan or ward of the state, 24 years of age, a veteran, married, has a dependent of his/her own, or is a graduate student, the student cannot be considered independent. If the parents won't cooperate in the process, the child will have to overcome the parent uncooperativeness by covering the full cost without aid. After the age of 24, the child can apply as an independent student.

If the parents will fill out the application forms, at least the child can then be awarded whatever eligibility dictates, and if the parents are unable to help by providing the amount expected, the child may be able to make up some, if not all, of the shortfall with personal earnings and unsubsidized Stafford loans. Because the loan amount is limited in the initial years ($2,626 in the freshman year), it can be difficult to meet all expenses, but if the student plans ahead and saves significantly from part-time and summer high school earnings, it usually can be done.

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6. MYTH: If the published deadline or priority date for applying has already passed, it is useless to apply for aid because there will be none left.

REALITY: There is always aid available for eligible students, even retroactively in the spring semester to go back and help meet fall semester costs. Deadlines are important, and late appliers may lose out on some forms of aid, but the largest grant, Pell Grants, stays funded all year, and Stafford loans are available as long as the student enrolls. So if you are late in applying, you will always be offered something, and many times it will be the same aid you would have been given if you had applied earlier. Schools often set their priority dates much earlier than when they actually run out of funds in programs with limited amounts. Never be discouraged from applying, despite the lateness of the date.

Accounts not paid in full at the beginning of each term usually incur interest charges. Early application for aid is the best assurance that such charges can be avoided.

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7. MYTH: Since the determination of financial aid need is based upon the prior calendar year, drastic changes in circumstances that reduce family income during the year the student is in school will have no effect on the student's eligibility for aid until the next year.

REALITY: If nothing is said to the Financial Aid Office, this myth would turn out to be reality. Whenever there is a drastic change in a family's financial situation whereby the previous year becomes a poor predictor of the current year's finances, the Financial Aid Office should be informed. In such cases, when sufficient documentation is presented, the aid officer can make a professional judgment to change the year of data upon which the analysis is based. Often an improvement in the aid offer can be made to help offset the financial losses that have occurred.

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8. MYTH: Changes in the applicant's/student's family income that generate more financial need can only result in increased loan opportunities, never grant increases.

REALITY: A few years ago, it was true that professional judgments that improved a student's eligibility had no effect on the Pell Grant. However, that was changed, and now major family financial upsets can be met with increased Pell Grants as a result of documented professional judgments made by an aid officer. In Wisconsin, the Wisconsin Higher Education Grant can also be impacted positively by this means. In fact, to the extent funding will permit, all grants are considered in an aid re-evaluation situation.

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9. MYTH: It is better for a student to turn down a need-based College Work Study Program job and work at regular non-need-based employment. More aid can be secured that way, as regular employment can be ignored as a resource to meet the assessed college cost. The student can replace the work-study job with a loan and still work at another job, thus ending up with more money.

REALITY: On the surface, it is true that the student will end up with more money in the year this is done than if he/she simply accepted and worked at a College Work Study Program job. Of course, taking more loans will mean more has to be repaid later. But the real reason it is normally not a good idea: earnings on the College Work Study Program do not have to be reported next year in the analysis of your financial need. Therefore, earnings of this kind will not reduce your eligibility for aid (even grants) the next year, whereas earnings on any other non-need-based program do have to be reported and will impact your aid eligibility.

The analysis protects (ignores) about $1,750 of a single dependent student's after-tax income ($3,000 or more is protected for independent students, with the protected amount rising as the independent student's family size increases), so if all your non-need-based earnings in this calendar year fall under this amount, your next year's aid will not be affected. However, if your earnings will exceed this amount, you would be better off accepting the College Work Study Program job to avoid reducing your aid (and grant) eligibility next year. 

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10. MYTH: If a student gets married, he or she will get better aid as an independent student.

REALITY: Once a the financial aid application is completed and submitted for a given year, marital status cannot be changed unless the status for the date of the original submission is being corrected. There is a particular regulation that forbids updating this information within the year. Aid won't be improved because of the marriage that year. If financial aid was not applied for earlier in the year, then an initial application can be submitted as a married student and the student would qualify to apply as an independent student on the basis of being married. Spouse financial information would be required instead of parental information.

Students from families where the income was low will discover that applying as a married independent student reduces their eligibility for a Wisconsin Higher Education Grant, perhaps as much as a $900 reduction. In effect, it will be necessary to borrow more to make this up. Because the analysis can only include direct student costs (and not the costs of the student's other family members -- spouse, children), there will not be an increase in aid to help support these other people. If the spouse is also a student, of course, the spouse can also apply for aid. It will be important for each partner to graduate as quickly as possible to keep overall costs and borrowing to a minimum because the loans will mount quickly for two people.

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