10 financial aid myths: What you don’t know can cost you

Facebook icon Twitter icon Print icon Email icon
Kathryn Flynn

By Kathryn Flynn

March 14, 2018

Brace yourself… College tuition bills are coming. Yet while many families will need help paying them, they are confused about how the financial aid process works and sometimes end up leaving money on the table. Here are 10 common costly myths about financial aid the truths behind them. 

Costly myth #1: 

We make too much money to qualify for financial aid, so there’s no reason to waste time with the FAFSA. 


Your Expected Family Contribution (EFC) is based on more than just income. The amount of financial aid your child is eligible for depends on a variety of factors, including the price of the school they will attend and if they have a sibling in college at the same time. Every student should fill out the FAFSA, regardless of their household income. 

Use our Financial Aid Calculator to estimate the expected family contribution (EFC) and your financial need.

Costly myth #2: 

Financial aid never has to be paid back. 


Over 35% of financial aid awarded is given out in the form of student loans. With this type of aid, your child will have to pay back every penny they borrow, plus interest.

Costly myth #3 

My child will be a sophomore next year, so we don’t have to worry about filling out the FAFSA again. 


The amount of federal aid your child qualifies for in one year does not carry over to the next school year. What’s more, Changes in your family’s financial situation could affect the amount of financial aid your child qualifies for in future school years. 

Costly myth #4: 

If I save for my child’s college with a 529 plan, they won’t get financial aid. 


Money saved in a 529 plan will count as a parental asset, and could reduce the amount of your child’s aid package by as much as 5.64 percent of the account’s value. However, this is significantly less than other savings vehicles, such as custodial accounts under UGMA/UTMA, which are considered student assets and are assessed at 20 percent. What’s more, around the first $20,000-$30,000 of parent savings will fall under the asset protection allowance and won’t be counted in the EFC.

Read: Yes, Your 529 Plan Impacts Financial Aid

Costly myth #5: 

We’re better off having our child’s 529 plan in his grandparent’s name. 


Assets owned by a grandparent or other relative do not have to be reported as assets on the FAFSA, however, when the money is given to a student to pay for college it will be counted as student income. Up to 50 percent of the value of student income is considered available money to pay for school. Meaning, a $2,000 withdrawal from a grandparent-owned 529 plan given to a student to pay for school can reduce his aid eligibility by $1,000. 

In contrast, while a 529 plan owned by a dependent student or one of their parents is reported as a parent asset on the FAFSA, distributions are not reported as income. Parent assets reduce financial aid eligibility by at most 5.64 percent of the asset value. Thus, $2,000 in a parent-owned 529 plan will reduce aid eligibility by at most $113. 

Costly myth #6: 

A Roth IRA is a better college savings option for a student who will apply for financial aid. 


While retirement assets do not have to be reported on the FAFSA, any distributions you receive from your IRA will increase the parent income reported on a future FAFSA. And income has a much larger impact than assets do in the EFC formula.


Costly myth #7: 

There’s no rush when it comes to filling out the FAFSA. 


In most cases, the early bird gets more financial aid to pay for college. Students who file the FAFSA during the first three months tend to receive double the grants, on average, of students who file the FAFSA later. It’s important to pay attention to federal, state and school application start dates, which are often as early as October 1. 

Costly myth #8: 

You’ll have to estimate your household income on the FAFSA. 


In previous years, families had to report the prior year’s income on the FAFSA. And since they weren’t able to apply for federal aid until January, they generally wouldn’t have filed their tax return yet for that year. Because of this, they had to estimate their income and make updates later. Now, the FAFSA requires you to report prior-prior year income. Since tax returns for the prior-prior year have already been filed, students can automatically transfer data using the IRS Data Retrieval Tool.

Costly myth #9: 

There’s no way we can afford to send our child to a private college. 


While the sticker price of a private college may be much higher than a public school’s, private colleges tend to award more financial aid in an effort to attract students from all income levels. In fact, after grants and scholarships are taken into consideration, you may end up paying less for private school tuition. 

Costly myth #10: 

When I fill out the FAFSA for my child, I only have to report the balance of her 529 account, and I don’t have to report the balance of her siblings’ 529 accounts. 


A 529 plan is considered a parental asset on the FASFA, so parents must report the total value of the 529 plans for all of their children. Keep in mind, however that having siblings can also reduce a student’s EFC, since the parent contribution portion is divided by the number of children in college.

RELATED: Estimate your financial aid eligibility

ORIGINAL POST: 09/21/16; UPDATED 03/14/18

A good place to start:

See the best 529 plans, personalized for you