Avoid These Common Financial Mistakes to Maintain Financial Aid
Money mistakes are pretty common. In fact, most people during their 20s make a number of money mistakes that lead to frivolous spending, and eventual brokenness. However, as individuals grow older, they tend to become more conscious about their money. That’s not to say that there are not some middle-aged adults out there that are still making quite a number of mistakes when it comes to how they handle their money.
Money management is extremely essential in this day and age. With the volatile economy that people are living in today, one small mistake can lead to bankruptcy, losing one’s home, and eventually living out on the streets!
One common mistake that parents make is believing that they can cut out the benefits of financial aid to their income after their children have decided on a university or college of their choice.
Of note is that these offers only apply during the first year of study. Hence, families will have to take the initiative of reapplying for financial aid at the beginning of every year that their child/children will be attending college.
As a result, quite a number of decisions that parents make during this critical period can proceed to make or tarnish the financial package and setup of the family.
Keeping this in mind, here are some of the faux pas to avoid during this critical college period.
Grandparents Offering Their Support at the Wrong Time
Despite meaning well by providing assistance, the timing in offering to pay for part of their grandkids college tuition can prove to be detrimental to the family.
Here’s a good example. Suppose a parent opts to give the family about $20,000 that is coming from a 529 college savings account that is theirs. The college that the child attends will consider this as part of the student’s income.
As you are aware, any income that is considered to be made by the child is given way more priority that any income derived from parental assets. In turn, this could then cut into the child’s aid.
Director and publisher for savingforcollege.com, Mark Kantrowitz advises that the best thing for a grandparent to do is to wait patiently.
After the student has finalized their sophomore year past Jan 1st, universities and colleges cease scrutinizing the income of the parents. Hence, any many provided by the grandparents from their 529 accounts can be used effectively without leading to the impairment of aid. That is unless the student goes an additional 5th year while they’re in college.
Additionally, grandparents can also take the route of waiting until their grandchildren have graduated and providing assistance when it comes to the payment of student loans.
Getting Plenty of Gain
When parents plan for their child’s education, they normally cash out on the investments they had initially made. However, once the date Jan 1 is crossed while your child is still in the 10th grade, this can prove to be a detrimental mistake.
That’s because any investment that accrues a capital gain for the parents would be detected by the first tax return, and this will be factored in by the Free Application for Student Aid (FAFSA), resulting in a reduction in financial aid.
An alternative solution could be for the family to sell the investments that are losing so that they any gains made are offset. However, if it is not possible to do this, the parents can opt to keep their investments and turn to borrow some money to finance the first two years of their child’s college period.
As a matter of fact, selling while your child is still in their junior or senior terms in college does not normally affect the amount aid offered.
Accessing Your Retirement Accounts
Although the IRS will not penalize you if you decide to utilize a traditional IRA when it comes to paying for your child’s college, they will tax you heavily if you withdraw anything out as income.
The biggest issue of using this technique while considering aid is that a parent will be adding seriously to their taxable income, and therefore colleges will expect them to dig deeper into their pockets for payment.
An alternative approach would be to get distributions from Roth IRA. However, no penalties would be incurred in such a situation. Additionally, you will not have any income tax accrued if you only withdraw the contributions that you have made, which had already been subjected to tax.
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