Jack Wang

GUEST COLUMN: Pitfalls of Filing for Financial Aid When Applying for College

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This is an article in an occasional series on personal finance. Each article will address a different aspect of personal finances and provide some tips for you. However, always consult your own financial adviser or tax professional for your specific situation.

Unintentional error on the Free Application for Federal Student Aid leads to a $200k per year college payment.

Or, how to wipe out your chances for financial aid in one easy step.

Can you afford $200,000 for college annually?

Most people would answer “no,” and thankfully there aren’t any colleges that charge that much per year.

Yet, what happened recently illustrates the pitfalls of filling out college financial aid forms, and how most people unintentionally make mistakes.

On the surface, they are the average American family. Dad is an IT executive. Mom works part time in the education field, and they have two high school students. Their oldest, a boy, will be graduating high school soon and is in the process of applying to colleges. Their youngest, a girl, is just a few years behind as a sophomore.

They have a nice house, two cars, and a little dog that likes to greet visitors with lots of kisses.

By all accounts, they are the average, upper middle income family in the area.

And like many families, the entire process of filling out college applications and financial aid forms causes a lot of stress with all of the requirements, essays, and deadlines.

When working with this family, I took their financial information – income and assets – and determined that their expected family contribution, or EFC, would be around $30,000. That’s the amount colleges would use to determine whether or not the family would receive financial need-based aid.

When filling out the FAFSA, we used the IRS Data Retrieval Tool to automatically transfer the income data to the financial aid form. It’s quick, it’s easy and most of the time, it’s accurate.

In this particular case, it was a little too accurate.

After hitting the submit button on the FAFSA, the bottom of the screen lists your Expected Family Contribution (EFC) in small letters with a six digit number. That number is really the dollar value of EFC based on the information you put in. But it’s in small letters. And most people go right past the text.

In this particular case, I noticed that the EFC was 200000 (or $200,000), well above what I had calculated for them. But we had already hit submit.

After thinking I had gone completely crazy, the family told me that they rolled over an almost $400,000 IRA from one company to another, and that transaction generated a Form 1099. On their tax return, that transfer was a non-taxable event. But for financial aid purposes, it looked like their income was higher by almost $400,000.

Now consider what would normally happen. Parents and students would be relieved at finally submitting the FAFSA and getting that part of the process done. Even with several confirmation emails stating the FAFSA was submitted, not much attention would be paid to the figures on the form. It’s done.

Imagine the surprise that most families get the following spring, when financial aid award letters arrive. Their student would not receive any aid. The parents would be left scratching their heads.

Think about it from the college’s perspective – they base their aid on information submitted, and because of the unintentional error, colleges would expect that the family is able to pay $200k per year. Of course the family wouldn’t need any aid.

At that point, parents would panic and frantically call the financial aid office asking if there’s anything that can be done. Even if the financial aid officer agrees there is an error, the college may not be able to offer any money as all of the aid is committed to others.

Families, then, would be left with a too-high college bill because of a small error on the FAFSA.

In this particular case, because we caught the error right away, we will be able to fix it easily and to re-submit the FAFSA before any damage is done. Still, it was only because we had calculated the EFC previously and knew where to look on screen that we even caught the error.

This is just one example of unintentional mistakes that can occur – on one out of over 100 questions.

So parents, what was your EFC when you submitted the FAFSA? Was is what you expected?

If you have already submitted your FAFSA, at this early date, you can still go back to make changes and re-submit if needed. That could save you thousands in college costs.

Financial Coach Jack Wang is a WestfordCAT sponsor whose show, “Personal Finance Playbook,” airs monthly. His firm, Longhorn Financial, LLC, is based in Chelmsford.