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Financial Aid Mistakes That Can Cost You (with FAQs)

a mother and daughter look at a laptop and financial aid application

Sometimes, simple financial aid mistakes can cost you money. Sure, filling out the FAFSA and understanding your student aid report can be complicated. But we can make it easier.

We pulled together a list of the most common mistakes students make. Then we answered the questions you'll probably have as you work through the process. With the expert insights shared here, you can do everything right the first time and maximize the total aid you'll get. 

Here are the top mistakes that cause students to lose financial aid with the most common financial aid questions.

Most Common Financial Aid Mistakes

Knowledge is power, so carefully review this list and let us know if you have any questions.

Not filing the FAFSA

The Free Application for Federal Student Aid (FAFSA) is used to apply for financial aid from the federal government, state governments, and most colleges and universities. Financial aid is based on financial need, which is the difference between total costs and the ability to pay.

Wealthy students, who might not qualify for financial aid at a low-cost in-state public school, might qualify for financial aid at a higher-cost school. Also, subtle changes, such as an increase in the number of children in school, can greatly impact eligibility for need-based aid. For example, when the number of children on campus increases from one to two, it is like dividing the parent's income in half.

So whether or not you think you'll qualify for aid, you should fill out the FAFSA. Too many times, students count themselves out before they even try. You will probably be surprised if you just fill it out. 

Marie D. Johnson, Director of Student Financial Services at the University of Vermont, told us, "There is a lot of misinformation about financial aid eligibility, and some students and families automatically assume they won't qualify for it. So they either don't complete the application or delay in doing so. While well-intentioned, advice from friends and family can be misleading and incomplete. It is always advisable to complete the FAFSA to understand your eligibility and to access student/parent loans if needed."                      

Waiting to file the FAFSA

It is best to file the FAFSA as soon as possible after the start of the FAFSA application season on October 1. Students who file the FAFSA during the first three months tend to receive double the grants. About a dozen states award state grants on a first-come, first-served basis. Many schools have priority deadlines for financial aid applications.

There is less money available to students who file the FAFSA later than others. Even some federal aid might be limited because schools receive fixed allocations of Federal Work-Study and Federal Supplemental Educational Opportunity Grants.

Not apply for scholarships

Some students wait until the spring of their senior year to apply for scholarships. By then, half of the deadlines have passed. Many scholarships have deadlines in the fall. There are scholarships you can win in younger grades and scholarships only after you are enrolled.

Some students don’t like entering essay competitions or applying for scholarships with low dollar amounts. Some students win scholarships but don’t do what they need to do to keep renewable scholarships in subsequent years. This is unfortunate because every dollar you win in scholarships is about a dollar less you have to borrow.

Saving in the child’s name (instead of in the parent’s name or a 529 college savings plan)

Student assets, such as money in a UGMA or UTMA account, reduce eligibility for need-based financial aid by 20% of the asset value on the FAFSA. (The CSS Financial Aid PROFILE form, which is used by about 200 mostly private colleges and universities, reduces aid eligibility by 25% of student assets.)

This is in contrast with parent assets in student or parent-owned 529 plans, which reduce aid eligibility by at most 5.64%. For example, $10,000 in the child’s name will reduce aid eligibility by $2,000, and $10,000 in the parent’s name will reduce aid eligibility by, at most, $564.

Saving in a grandparent-owned 529 college savings plan

Although money in a grandparent-owned 529 plan is not reported as an asset on the FAFSA, it severely impacts eligibility for need-based financial aid, much worse than saving the money in the child’s name. The full amount of qualified distributions from a 529 plan that is not reported as an asset on the FAFSA will count as untaxed income to the beneficiary (the student).

Eligibility for need-based financial aid is reduced by as much as half of the untaxed income to the student. For example, a $10,000 distribution from a grandparent-owned 529 plan will reduce aid eligibility by as much as $5,000.

Increasing income in the base year

The FAFSA bases income and taxes on the prior-prior year’s federal income tax returns. For example, the 2022-2023 FAFSA is based on 2020 income and taxes. Increasing income during this base year, such as through capital gains and retirement plan distributions, can significantly reduce eligibility for need-based financial aid. 

Not Comparing Financial Aid Offers

Not comparing your financial aid offers by looking at out-of-pocket costs is a big mistake. Our expert Marie D. Johnson explains, “It is important to understand how to compare aid offers to know the true costs of various options. Sometimes people believe that because one school has a larger scholarship or aid offer than another, it automatically means that the school is lower cost.” 

Maria continued, “To determine the bottom line cost after aid for each school, it is important to focus on laying out tuition, fees, housing, and food costs and then deduct only scholarship and grant offers for each school to compare them then.” If you add student loans to the total aid amount in the equation, you’re not getting an accurate estimate of out-of-pocket costs since you’ll have to pay back the loans plus interest. Free money always beats money you have to pay back. 

Not claiming education tax benefits

The American Opportunity Tax Credit and Lifetime Learning Tax Credit are claimed on your federal income tax return based on amounts spent for tuition and textbooks during the tax year. There’s also a student loan interest deduction. But, some families fail to claim these education tax benefits because they are confused or because they are claimed many months after the money is spent. 

Not signing up for auto-debit on student loans

Auto-debit automatically transfers monthly student loan payments from your bank account to the lender. Not only will you be less likely to be late with a payment, but most lenders also provide an interest rate reduction to get borrowers to sign up for auto-debit.

Borrowing private student loans instead of federal student loans

Students should always borrow federal first because federal student loans are cheaper, more available, and have better repayment terms than private student loans.

Not appealing for more financial aid 

If a family has special circumstances that affect their ability to pay, they should always appeal to the financial aid office for more financial aid. Ask for a professional judgment review. Special circumstances include anything that has changed from the base year to the current year, such as a job loss, salary reduction, death, or disability.

Most Common Financial Aid Questions

Now we'll answer some of the most common financial aid-related questions we hear. 

What’s the difference between a loan, a scholarship, and a grant?

A loan is given to a student under the expectation that the student will repay the sum in the future. Loans come with interest rates, which dictate how much the sum grows over time. The lower the interest rate, the less the sum grows.

Scholarships generally come in two forms: merit-based and extracurricular. Merit-based scholarships are sums of money awarded to students for their academic achievement, such as high GPA, test scores, or for improvement over time. Many colleges require students who receive a merit-based scholarship to maintain a certain GPA.

Extracurricular scholarships are awarded for talent in a certain activity. The most popular are for participation in sports, clubs, and national student organizations. These usually require continued participation in the given activity for the student to receive the sum.

Grants are like scholarships since they don’t need to be repaid, but they come in different forms. Many grants are need-based and are awarded based on household income. Academic performance-based grants do exist, as do grants that require future employment in a certain subject field or interest in a particular topic.

Where can I look for scholarships?

A great place to start looking for scholarships is on the Cappex website. We pair you with scholarships that are a perfect match for you. For each scholarship, we show you how many people apply, how much work goes into the application, the amount awarded, and the application deadline. We have more than $11 billion in scholarships listed in our database.

You also could talk to your high school’s college counselor or those you know who have already started attending college. It also wouldn’t hurt to ask the advisors of your extracurricular activities if they know of any scholarships they think are a good fit for you.

What’s a Federal Pell Grant?

The Federal Pell Grant is awarded to undergraduates who have not earned a degree. It doesn’t need to be paid back, plus the maximum amount awarded increases every year, currently as much as $5,920. The amount depends on financial need and your status as a full- or part-time student. You must fill out the Free Application for Federal Student Aid (FAFSA) to apply for Federal Pell Grant.

What’s a Federal Stafford Loan?

Federal Stafford Loans are federal student loans offered to eligible students who submit the FAFSA. Since the U.S. government provides loans, Federal Stafford Loans carry a lower interest rate than private loans.

These loans come in two forms, subsidized and unsubsidized. The former is offered to students based on financial need and the government pays for the interest on the loan while the student is in school. Unsubsidized Federal Stafford Loans are offered to more students, with interest paid for by the borrower while they attend college.

If the borrower does not pay the interest as it accrues, it is added to the amount owed. Both types of Federal Stafford Loans are available for eligible undergraduate students, with graduate students only able to take out unsubsidized loans as of July 2012.

Special circumstances also distinguish the family from the typical family, such as high unreimbursed medical and dental expenses, high dependent care costs for a special needs child or elderly parent, and one or both parents genuinely enrolled in an undergraduate or graduate program. Special circumstances can also include one-time events that do not reflect the ability to pay during the academic year.

What are assets on FAFSA?

Some assets must be reported on the FAFSA, while others are not. Knowing which is reported can save you thousands of dollars. Reportable assets include cash, money in the bank, college savings plans, real estate, and trust funds. Non-reportable assets include small business assets, life insurance, a primary residence, and personal possessions.

We cover the topic of sheltering assets on the FAFSA here.

How can I add more than ten schools to my FAFSA?

Ahhh. Why can't they make it easy for us, right? But there is a workaround. You can add additional schools after submitting your FAFSA with the first ten on there. We explain how to add more schools here. 

Do I have to fill out FAFSA every year?

Yes. But it gets easier each time. And be sure to pay attention to the tips above. So it makes sense to bookmark this article. 

What is a student aid report?

Your student aid report is a document that gives you information about your eligibility for federal student aid, like the Pell Grant and loans. It also tells you your Expected Family Contribution (EFC). To access your report, log in to and select the “View SAR" option on the “My FAFSA" page.

Why are loans such a problem for students?

Student loans look appealing at first glance because they promise large sums to pay for college with no immediate downside. But unless you pay close attention to your monthly payments, debt balance, and interest rate, it’s very easy to make a mistake.

For example, a student can overborrow and end up with a debt balance that could balloon to an almost impossible amount to pay back. A borrower also could settle for the first student loan they find, ignoring other student loans with lower interest rates.

Even forgetting to change your contact info could lead to late fees. These are a few ways loans can bite back. Keeping track of loan payments and ensuring you’re getting the best interest rates are essential to not falling victim to student loans. 

Let Appily Help You Find Scholarships 

Now that we talked about mistakes that cause you to miss out on financial aid, it's time to introduce you to the most up-to-date scholarship database around. With a free Appily profile, you can search for and save scholarships to help you pay for college.

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