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PERSONAL FINANCE

Parents often fumble on financial aid forms

The most costly mistake is not making the effort to apply at all -- and missing out on money for college.

January 20, 2008|Kathy M. Kristof | Times Staff Writer

High school seniors have been scrambling for months to complete their applications for college. Now it's their parents' turn to sweat.

The start of the year marks the launch of financial aid season, when parents fill out exhaustively detailed forms in an effort to get their share of the billions of dollars of assistance available. Unfortunately, aid forms can be every bit as unnerving as college applications. Missteps can cost thousands.

Here are some tips to avoiding the most common mistakes parents make when filling out financial aid forms:

Buckle down and apply

It doesn't matter how much you earn or whether your educational aspirations are modest or grand: If you have a child attending college next fall, you and your student should fill out the Free Application for Federal Student Aid now. The FAFSA is the first step in getting money from all types of government and school programs as well as many kinds of private scholarships. (Some private colleges also require a second aid form known as the CSS Profile.)

"Every student should be filling out the federal financial aid form," said Robert Shireman, executive director of the Project on Student Debt in Berkeley.

The problem is that the FAFSA makes a tax return seem like a breeze, so if you think you aren't likely to be eligible for aid you might be reluctant to go through the hassle. That would be a mistake.

This year, a number of pricey private colleges have changed their aid rules to provide more money to better-heeled students, Shireman said. The federal government also revamped the Higher Education Act, boosting scholarship amounts for needy students.

And it's important to note that a family's need is based on a complicated formula that takes into account a host of factors, including several that are bound to change, such as the parents' age. One small difference -- such as sending a second child to college -- can have a dramatic effect on how much aid you qualify for.

So, too, can changes in the value of your investments, because they affect the calculation of your net worth. For example, the stock market's recent dive could help you when aid is doled out.

"If a family doesn't get anything in the first year, they give up," said Reecy Aresty, a financial aid counselor in Boca Raton, Fla. "They figure they won't qualify, so why bother? But what happens in one year is not necessarily an indication of what will happen in subsequent years."

And if you don't fill out the FAFSA, you'll never know.

Don't procrastinate

The FAFSA asks for information from the parents' 2007 tax returns, which makes it tempting to delay filling out the aid form until you've done your taxes. That can be a big mistake, for two reasons:

First, some aid -- particularly the money handed out by colleges -- is limited and is granted on a first-come, first-served basis. The later you file, the less likely you are to receive a substantial amount, said Kalman Chany, a New York-based aid counselor and author of "The Princeton Review Guide to Paying for College Without Going Broke."

Second, schools and states set varying deadlines for financial aid applications. Some of them are as early as January. If you miss them, you miss out on that help.

If you fill out the FAFSA before you do your taxes, the form allows you to enter estimates of the figures that will be on your 2007 tax return. You will then need to update the FAFSA after you file your tax return.

Ignore retirement assets

In attempting to figure out how much parents and students can afford to pay for school, the federal financial aid formula takes into account their assets as well as their income. But certain types of assets aren't counted -- unless you make the mistake of putting them on the form.

The important details of what not to include are buried in 11 pages of forms and accompanying instructions. And if you fill out the form on the Web, you're likely to have an even tougher time knowing what to exclude from your net worth, Chany said.

One of the most common mistakes is assuming that your net worth ought to include your retirement assets -- the money in 401(k), 403(b), 457 plans or individual retirement accounts, Aresty said. If you have a nice-size retirement nest egg, counting it can be a massive mistake.

Consider this: If you include the value of a $500,000 retirement account on the form, you've just cost yourself about $28,000 in annual aid eligibility.

Don't repeat assets

Another big mistake often made on the FAFSA is repeating assets. Many people do it because the instructions seem to indicate that you should, Chany said.

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