University of Virginia

3 Well-intentioned mistakes paying for college

We all want to avoid mistakes, especially expensive ones. Sometimes all it takes is a little planning and thinking ahead. Here are three common mistakes that parents make when it comes to paying for college.

Selling investments at the wrong time

You might have some investments that you’ve socked away to pay for college. Great! If they are in a regular investment account (not a 529), when you sell them you will incur capital gains.  Capital gains will increase your income which will increase your Expected Family Contribution on the FAFSA.  As a result, you will not qualify for need-based aid that you might qualify for otherwise.

So what do you do? You can still sell, but you have to sell earlier than you think. Let’s say your daughter is a risking junior in high school. You will file your first FAFSA in January of her senior year.  The FAFSA will ask about your income during the calendar year that she is part junior (spring) and part senior (summer and fall).  This means that if you want to sell some investments, you should do so before December 31 of your daughter’s junior year.

(Note: the CSS Profile form that some colleges use will still pick up this income.)

Taking a retirement plan distribution

The FAFSA considers retirement plan distributions to be income in the year received. The increased income will hurt your chances for need-based aid. You won’t have to pay a penalty if the money is used for college, but you will have to pay taxes on the earnings and your EFC will go up.  Even a return of Roth contributions is picked up on the FAFSA as untaxed income.

So what do you do? It is possible in for the financial aid office to adjust your EFC if the retirement plan distribution was made for certain specific circumstances. (Just needing the money to pay for college is not going to be one of them.) If your distribution was one-time and you have a documented hardship, it might be worth pursuing an adjustment. We can help you with that. In general, though, if you have not taken the distribution, don’t!

Grandparents paying the college bill

This happens far too often – grandparents who want to help but aren’t sure how, and they learn that there are estate tax benefits to paying tuition directly, so they do. They’ve done a very nice thing, but it will likely hurt your financial aid.

So what do you do? If you are lucky enough to be in this situation, you want to be very careful in how you structure your funding plan. Don’t do anything until you’ve considered all the options and how they will impact your family. This is a great example of how ‘what works for one family doesn’t necessarily work for another’ holds true.  Understand the implications on your aid and your EFC and you’ll make wiser decisions.