August 29, 2018 / 6:49 PM / 9 months ago

COLUMN-Four money mistakes to avoid and keep your financial aid

 (The opinions expressed here are those of the author, a
columnist for Reuters.)
    By Gail MarksJarvis
    CHICAGO, Aug 29 (Reuters) - Parents may think they can stop
paying attention to financial aid after their child has decided
on a college, but those offers generally apply to only the first
    That means families have to reapply for financial aid each
year a child will be in college.
    Many of the money decisions people make during this crucial
period could make or break their financial aid package.
    The following are four mistakes to avoid:
    1. Bad timing from help from grandparents
    Grandparents may mean well by offering assistance, but if
they give money at the wrong time, it can dent an aid package. 
    For example, if a grandparent gives $10,000 from a 529
college savings account that they own, colleges count that as
student income. Income in a child's name counts a lot more than
parental assets or income, so it could substantially cut into
    A solution for grandparents who want to help is to wait,
said Mark Kantrowitz, publisher and director of research for 
    Once past Jan. 1 of a student's sophomore year, colleges
usually stop scrutinizing family income. So money from a
grandparent's 529 can typically be used without impairing aid -
unless the student goes to college for a fifth year.
    Grandparents could also wait until after graduation and
instead help pay off student loans, said Kalman Chany, financial
aid consultant and author of "Paying for College Without Going
    2. Too much gain 
    Parents often plan to cash out investments to pay for
college, but once the calendar crosses Jan. 1 of your child's
tenth-grade year, selling can be a costly mistake. 
    Any capital gain on an investment would hit the first tax
return used in the Free Application for Student Aid (FAFSA) and
would thereby reduce financial aid.
    One solution could be to sell losing investments to offset
any gains. If that is not possible, Chany suggested holding on
to investments and instead borrowing money to pay for the first
two years of college. Selling during junior and senior years of
college will typically not hurt your aid offer.
    3. Taking a second mortgage
    For parents thinking about financing a college education by
cashing out equity in their house with a second mortgage, there
will be consequences for holding on to the large stash of cash
in your bank account – not to mention interest costs to the
    A better solution, according to Chany is to use a home
equity line of credit. With this set-up, you only withdraw money
when you need it to make tuition payments and it will not just
sit on your balance sheet.
    Ironically, taking money out of your house may also boost
your aid package with some colleges. If the school is among
those that counts your home as an asset, reducing your equity
stake in the property could make you eligible for more aid. 
    4. Raiding retirement accounts
    Although you will not be penalized by the IRS if you use a
traditional IRA to pay for college, you will get taxed on
anything you take out as income. The real problem with this
approach for aid is that will be adding to your taxable income,
and so colleges will expect you to pay more. 
    The same goes for distributions from a Roth IRA, even though
no penalties  would be incurred and there will be no income tax
if you only remove your own contributions, which have already
been taxed.
    Instead, Chany said, borrowing from a 401(k) and using the
money immediately to pay for college should not hurt aid This is
a risky move overall, however, since if you lose your job and
cannot pay back the funds, you will face penalties.
    Even riskier is putting college needs first, since those
retirement accounts are not easily replenished.
    "It's not a good idea to raid these funds because you will
be closer to retirement when your child finishes college," Chany

 (Editing by Beth Pinsker and G Crosse)
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