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Educate Your Student About Debt DangerErica Sandberg
By Maxine Seya
December… For some high school seniors and their parents this has been the toughest month of the year and for others the most joyous. And no, I'm not talking about pandemic stay-at-home orders and winter holidays.
With early college admission decisions in, and regular decision applications due in just days, it's an emotional and frantic season for students.
Parents may find themselves scrambling, too, as they try to get a handle on college finances before helping their kids choose a home for the next four years.
Both new and returning college students need to fill out a variety of forms in order to be considered for financial aid. Your high school senior may be considering schools (mainly private colleges and universities) or applying for scholarships that require the CSS Profile (administered by the College Board).
As you help them complete the CSS Profile, did you know that some of your hard-earned assets can hurt their aid package? In contrast to the FAFSA, a free application form used by schools to award federal aid based primarily on family income, the CSS Profile looks beyond income and digs deeper into your asset history.
Two experts — a college financial aid director and a college funding specialist — detail four little-known ways that assets reported on the CSS Profile can hurt your student’s financial aid package.
You did everything right. When your baby was crawling on all fours and downing apple sauce from a sippy cup, you listened to conventional wisdom (or perhaps your mom or your banker) and started saving for tuition in a 529 college plan that's now pretty sizable.
But 529s, while popular, can keep you from getting the biggest aid package possible. Andrew Hathaway, college funding specialist, wrote, "529s are counted as a non-retirement asset, and then when you start taking money out of the vehicle, it is counted as student income or sometimes as untaxed income."
The higher the income, the lower your student's aid package from most colleges. If drawing money from a 529 plan increases your income, then by most rules, the financial aid award will decrease.
You've diligently stashed away a portion of your paycheck into your 401k or IRA and chose to work for companies that matched your contribution. You're feeling pretty good about retiring comfortably in the future.
While retirement accounts aren't traditionally used against you on the FAFSA or CSS Profile, they're used to judge your worthiness for additional aid.
Leah Young, the Director of Financial Aid at Dickinson College, said, "If somebody comes back to us asking for more aid, saying that they're having trouble, and we see that they have significantly above average retirement funds for someone their age, we may be a little bit more hesitant than for someone who is well below that average."
And how exactly does anyone know the average retirement account balance for every age?
"A lot of times I'll Google 'average retirement at age 50 or 60.' We also get a feel for it as we're seeing a lot of applications," Ms. Young explained.
Most people have no idea where they stack up amongst their peers in terms of retirement funds. So before you submit any aid apps or appeal an award, do a little Googling yourself to see how much leverage you actually have. "I only have 30% saved in retirement compared to other 50-year-olds," might not stroke your ego, but could get you more financial aid from the school in an appeal. The opposite — "I have four times the amount saved in retirement as my 50-year-old peers" — probably won't help you win that appeal.
While the FAFSA doesn't collect information about your cars, you may be asked to list the make, model, year and purchase price of any vehicles you own on the CSS Profile or specific university aid applications.
When you get to this part of the application, you may wonder, "What in the world does my car have anything to do with college financing except for maybe hauling my kid and all their stuff to campus next fall?!"
Schools aren't calculating your child's financial aid based off of your personal possessions, but like the retirement account, it gives aid reviewers a fuller picture of your financial situation.
Your luxury cars won't raise any red flags unless they're coupled with a low income.
"If you have a 2020 BMW and $10,000 a year in income, we're going to wonder what else is going on behind the scenes," Ms. Young of Dickinson College said. A financial aid director like her could be thinking where is this family getting the money to buy a $100k car with $10k/year income? Could they have other sources of income that allow them to pay for college that another family may not?
Leading a financial aid director to question your activity "behind the scenes" is not good news. Schools want to award funds to the genuinely neediest. When comparing two families with $10k/year incomes, the one with the 2020 BMW will look less deserving of aid.
You worked hard to buy that house. Your home value has appreciated over time and you now have the privilege of taking out home equity loans to pay for remodeling, vacations or — as some schools believe — college tuition.
Some people who underreport their home equity in hopes of getting a larger financial aid package might be disappointed. When Dickinson College reviews applications and smells something fishy, a simple online search might solidify their suspicions.
"If something looks amiss…we might take to Redfin or Zillow and just be like: 'Is this realistic?' I have heard of other schools doing this for every address," said Ms. Young.
In December 2018, Stanford University removed home equity from students' financial aid calculations. Like Stanford, while not all schools consider it, many like Dickinson do and might dig deeper into public records online if your self-reported values look amiss.
Even if the quick internet search doesn't change your financial aid award, just the fact that the financial aid staff thought something was off in your application might tarnish their trust in you should you appeal for more aid.
First of all, don't panic. Keep building your assets. And know that, when crunching their numbers, every school that asks for the CSS Profile and/or a separate university aid application will look at your cars, home equity and retirement accounts differently.
Because of that, remember:
If you stay inquisitive and know your options, you’ll retire happily, driving your favorite car and living in your dream home — all while knowing that you sent your kids to the best schools possible at the best possible price.
College move-in is approaching! Help your student prepare by making sure they have everything they need for a successful freshman year.