Parents may think they can stop paying attention to financial aid after their child has decided on a college, but those offers generally apply to only the first year.

That means families have to reapply for financial aid each year a child will be in college.

Many of the money decisions people make during this period could make or break their financial aid package. Here are four mistakes to avoid:

1. Bad timing from help from grandparents

They may mean well by offering help, but if they give money at the wrong time, it can dent an aid package. For example, if a grandparent gives $10,000 from a 529 college savings account that they own, colleges count that as student income. This counts a lot more than parental assets or income, so it could cut into aid. A solution for grandparents who want to help is to wait until after Jan. 1 of a student’s sophomore year, when colleges usually stop scrutinizing family income.

2. Too much gain

Parents often plan to cash out investments to pay for college, but once the calendar crosses Jan. 1 of your child’s 10th-grade year, any capital gain on an investment would hit the first tax return used to determine financial aid. One solution could be to sell losing investments to offset any gains. If that is not possible, hold on to investments and instead borrow money to pay for the first two years of college.

3. Taking a second mortgage

For parents thinking about financing a college education by cashing out equity in their house with a second mortgage, there will be consequences for holding on to the large stash of cash in your bank account. A better solution is to use a home equity line of credit. With this setup, you only withdraw money when you need it to make tuition payments and it will not just sit on your balance sheet.

4. Raiding retirement accounts

Although you will not be penalized by the IRS if you use a traditional IRA to pay for college, you will get taxed on anything you take out as income. Instead, borrowing from a 401(k) and using the money immediately to pay for college should not hurt aid. This is a risky move overall, however, since if you lose your job and cannot pay back the funds, you will face penalties. Even riskier is putting college needs first, since those retirement accounts are not easily replenished. “It’s not a good idea to raid these funds because you will be closer to retirement when your child finishes college,” said financial aid consultant Kalman Chany.


Gail MarkJarvis writes for Reuters.