13 financial aid traps

2. Don't bother starting with 529s -- it's too late. 
This gets into a bit of legalese, but 529s are treated as an asset of the account owner, not a resource, with a maximum impact on aid of 5.64 percent compared with the dollar-for-dollar weighting on assets.

Kantrowitz says: "It's never too early or too late to start saving in 529s. The tax benefits of Section 529 college savings plans can save you money even on a short-term investment horizon. But keep the money in liquid investments, so that you can access it quickly if you need the money to pay college bills."

3. Put savings in the student's name to shelter them from taxes. 
While this may save some money at tax time, the opposite strategy works best when applying for financial aid. "The general rule is that unless the family is completely sure the child will not qualify for need-based aid, it's best to keep savings in the parents' name," says Kantrowitz.

4. Just charge it. 
All debt is not created equal, at least not under financial aid rules. All the thousands of dollars you've run up on credit cards aren't counted in your favor on financial formulas -- in fact, credit card debt isn't taken into consideration at all. That's only one of the reasons it's best to pay down balances, and auto loans if possible, to better reflect your true financial situation. Only secured debt -- think mortgages -- counts in the needs-analysis formula.

5. Delay stocking up on college supplies. 
Maybe it's more fun to take the wrapper off the new stereo once you're settled into your dorm room, but if you have any big-ticket items like a computer or a car you'll need before trotting off to college, make as many as of those purchases as possible before you file the FAFSA.

So feel free to run right out and spend your savings on a dorm fridge and microwave, but re-holster that credit card if you don't have the funds on hand. The same advice doesn't apply to purchases you plan on charging (see flub No. 4).

6. Withdraw money from retirement accounts. 
According to Kantrowitz, besides the penalties you'll have to pay for withdrawal, if you withdraw too much money or withdraw too early (before you file your FAFSA), it will be counted as an asset and will cut into your aid determination.

You could borrow against a 401(k) plan (you can't borrow on an IRA), but taking the money out is bad for other reasons. By the time most parents’ children are ready for college, they most likely have only 20 more working years ahead of them.


Your children will have their whole working lives to save for retirement. So leave your retirement savings untouched -- and growing.

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