Early Birds Grab the Financial Aid

To get any help with paying the bills, every parent needs to file this form now.

Like many high school seniors, Lauryn Sherman spent hours gathering information and filling out forms to ensure that she was on top of her college applications. Now it's her parents' turn to pore over paperwork. Helen and Tim Sherman of San Diego will spend the first few days of the new year completing the Free Application for Federal Student Aid (FAFSA). "We're hoping something comes through to reduce costs," says Helen, who owns a business that supplies merchandise to museum shops.

The Shermans don't expect to qualify for need-based aid, but they think their daughter, a stellar student, may attract merit scholarships. Because the FAFSA is the starting point for everything from merit awards to government-sponsored grants and loans, even affluent parents should fill it out, says Gary Hoffman, a college financial planner in Charlottesville, Va. "You can't get aid if you don't file the form."

After you provide your financial information, you submit the form to the U.S. Department of Education, which calculates your expected family contribution (EFC) and reports it to the colleges you request. The colleges compare your EFC with the cost of attendance and close the gap with a mix of grants, loans and work-study. At an expensive private school, that gap could be a chasm, in which case, says Jacqueline King, of the American Council on Education, "a middle-income family may very likely qualify for need-based aid." At best, your child will be awarded free money that doesn't have to be paid back; at worst, he or she will be offered a Stafford loan, with an interest rate (6.8%) and generous repayment terms that still make it attractive.

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File early. A college's free money runs out fast, says Deborah Fox, the college financial planner who advised the Shermans. "Certain schools do award aid on a first-come, first-served basis." If your Form W-2 has yet to arrive, estimate your tax information and correct it later. Many colleges also require that you fill out their own application for financial aid and each one has its own deadline -- "some in January, some in February," says Rick Darvis, of College Funding Inc., in Plentywood, Mont.

Push send. Using the online application not only eliminates snail-mail time delays but also flags clerical errors. Last year, those advantages persuaded 94% of families who filed a FAFSA to do so electronically. Allow a few days before filing to apply for a PIN, which lets you "sign" the FAFSA.

Decide who counts. If you and your spouse are living apart or are divorced, only one of you is reported on the form -- "the parent who has custody of the student the longest during the year," says Fox. When parents share custody equally, the chore of filling out the FAFSA falls on the parent who provided the most financial support over the previous 12 months.

No matter who applies, if that parent has remarried, he or she must also include the new spouse's financial information. Even if stepparents have prenuptial agreements that say they won't contribute to the education of their stepchildren, "it doesn't matter," says Darvis. "A stepparent still has to list income and assets."

Get your pronouns straight. Although you, the parent, may be the one who fills out the FAFSA, the you referred to throughout the application refers to the student. That can get confusing, says Marcia Weston, of the National Association of Student Financial Aid Administrators, because the form asks for both the student's and parent's information, as well as that of the student's spouse, if any. Entering your information -- say, your Social Security number -- instead of your student's will stall the application, says Weston.

What are you worth? On the 2007-08 FAFSA, business owners with fewer than 100 employees do not have to report business assets. That's "huge," says Fox, because it potentially slashes your EFC. (People who live on and operate a family farm can also exclude that asset, even if they have off-site partners, says Darvis.)

The equity in your primary home doesn't count against you in the FAFSA equation, although it may in the college formulas. As for investment assets, such as rental property, estimate what the property would bring if you sold it within 30 days. Note that you're permitted to subtract selling costs, taxes and other liabilities.

Check your income. Two of the most common FAFSA boo-boos are also the simplest, according to FinAid: reporting your adjusted gross income on the line that asks for your tax liability, and citing the taxes that were withheld rather than your actual tax liability.

As of 2007-08, students are expected to kick in 20% of their assets to the college tab, as opposed to 35% in previous years. Tax-advantaged college-savings vehicles that are in the parent's name, including prepaid-tuition plans, are now deemed parental assets and assessed at 5.6%, the parent's rate. If the accounts are in your dependent student's name, you may omit them from the FAFSA altogether, at least for now. That loophole, which was created accidentally by a drafting error in recent legislation, will be closed as of 2009-10, when student-owned accounts will be treated as parental assets in the federal financial aid formula.

Whom do you support? In determining who is a member of your household, you not only get to count the student who is applying for aid but also any other children for whom you provide at least half of their support, even if they don't actually live with you. You may also include a child who will be born before July 1. If you have primary custody of your child but your ex provides more than half of his or her support and you're each filing the FAFSA for other children, you can both list as a household member the child whose support you share.

Jane Bennett Clark
Senior Editor, Kiplinger's Personal Finance
The late Jane Bennett Clark, who passed away in March 2017, covered all facets of retirement and wrote a bimonthly column that took a fresh, sometimes provocative look at ways to approach life after a career. She also oversaw the annual Kiplinger rankings for best values in public and private colleges and universities and spearheaded the annual "Best Cities" feature. Clark graduated from Northwestern University.