College Funding: Tackling the Myths

Okay, so who spread the rumor that savings are ‘bad, actually’ when thinking about college for kids?

I’m aware that college tuition is nothing to joke about in an environment where student loan debt is practically normalized. But that doesn’t mean that we have to buy into myths like having a college fund or assets lowers the chances of scholarships and aid offered to prospective attendees. Student loan debt is a whopping $1.7 trillion, and these myths only add to it.

Many parents don’t understand how college-funded financial aid works, and that’s okay. Today, let’s bust a few myths about college savings and break down what different kinds of aid could look like for your kids:

• College Savings In The Current Economic Climate
• How College Aid Works For Different Socioeconomic Backgrounds
• Why Saving Too Much Won’t Exempt You From Student Aid

MythBusters: No, Saving Money Won’t Exempt Student Aid

Let’s be frank, saving up or having assets dedicated to helping your child out with college, will not come in between them and any sort of scholarship or college provided aid.

However, it is such a widespread rumor that people buy into it solely because they hear it everywhere. About 813,000 students ended up missing out on financial aid, just because they believed they wouldn’t be eligible due to their high-income families.

But that isn’t the case at all, there is no income limit in the Free Application for Student Aid (FAFSA) guidelines.

The truth is that parental assets such as savings and nest eggs contribute only 5.6% when calculating the financial aid formula. If anything, your annual income matters more than that. So, savings of any kind don’t affect the FAFSA decision-making as much as others would lead you to believe.

Not even retirement savings.

Besides, saving up for your child’s eventual higher education is a wonderful decision because it enables them to be financially independent without the burden of a huge debt behind them. It’s why a 529 savings plan exists in the first place.

A 529 savings plan offers full autonomy of the funds to the owner, offer tax-free growth, and you can transfer beneficiaries without much fuss. And what’s even better is the latest change to the 529 plan, which allows unused funds in the account to be automatically transferred into an individual’s Roth retirement account.

So, no wonder parents are committing to the 529 plan, with 23% of them stating it is precisely because of this Roth rollover that they shifted to saving again. That’s two birds with one stone.

Need Vs Merit: A Financial Aid Option For Everyone

Most parents don’t realize that college tuition isn’t a one-size-fits-all situation. Public and private education aside, the one thing they share is that both have different options available for students from all sorts of backgrounds.

Colleges in the U.S. usually have two forms of financial aid available for incoming students; need-based aid and merit-based aid. That’s essentially what scholarships are, alongside grants, loans and more.

Need-based aid focuses on providing support and funds to those from lower-income households. But merit-based aid doesn’t look at income; the students are chosen for merit rather than their academic performance and/or achievements in the arts, sports, and other areas.

However, scholarships and grants might still have specific requirements, such as income levels, racial demographics, and more, even if they are a form of merit-based aid. However, there are still plenty of options that people could apply for where their assets and income would not come into question.

Application should be a high priority here. Many experts advise families to fill out FAFSA forms despite their income because so much of it ends up unclaimed for no reason. The average grant given out by colleges is $14,000 per year, which goes a long way toward helping a student with tuition, books, and more.

So much financial aid is being offered by colleges and universities that college tuition has actually been declining over the past decade. So, missing out on that is a bad financial decision, no matter how you put it.

Why Applying For Aid Is Simpler Than You Think

We have complicated college tuition to some extent. A lot of it is because of hearsay from people who are also going through this for the first time, like family and friends.

The FAFSA is free to complete and submit. You just need to know your state deadline and keep key information on hand, such as bank statements, asset information, and records of untaxed income. The form itself can be completed in multiple sittings as long as you have an FSA ID on the official website.

And if you’re scared about messing upany of the more technical details, such as your tax information, worry not. The IRS Data Retrieval tool ensures that you make no errors because the information is transferred automatically.

So, what’s the hold up? Why aren’t more students applying for financial aid?

Well, 36% of those who didn’t end up filling out the FAFSA form said that they believed they wouldn’t get any aid at all. So, it was a moot point in their eyes.

However, only 70% of families with college-going kids applied for the FAFSA in 2021. Not only did a majority of them get financial aid, but 20% appealed for more aid than the amount offered and received approval.

Furthermore, financial aid has doubled since the early 2000s, going from $5000 in 2001 to $10,000 by the end of 2010. While much of that could be adjusted for inflation, it’s still a huge boost to have some extra finances during this current economic climate.

So far, about 85% of college students in the U.S. receive some form of financial aid. But only 43% of them are from lower economic backgrounds. Which means the rest of them are getting financial aid despite being from stable or even high income households. It’s only a matter of applying.

There is plenty of misinformation around college savings and how they can affect student aid going forward. But it’s actually recommended you save up for higher education and still apply for FAFSA because your savings don’t have any bearing on your chances of getting student aid.

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