Parents often fumble on financial aid forms

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.

For example, both parents and students are supposed to list their assets minus debts. However, there’s some overlap. For instance, assets in so-called 529 and Coverdell education savings plans that are in the parents’ names should be included in the calculation of the parents’ assets. However, the instructions on what assets students should list on the form refer them back to what parents should include. That might lead the gentle reader to imagine that students, who are the likely beneficiaries of 529 and Coverdell accounts, should list those accounts as well. That would cause a double-counting of the assets in the accounts.

In addition, the fine print of the net-worth calculation instructions tell you to exclude cash and savings held in bank accounts. The reason: That money is asked for elsewhere on the form. If you skip lightly over the instructions, you might assume that bank accounts should go into the net-worth calculation. Don’t assume that. On the FAFSA, putting any amount down twice causes it to be double-counted.

“You should not be repeating anything,” Chany said. “No asset that’s in one category should be listed again at another place on the form.”

Note exemptions

If, say, your child’s aunt, uncle, grandparent or godparent has opened a 529 account on the child’s behalf, there is no place on the financial aid form to put that asset. So don’t make the mistake of listing it. In addition, there is currently no place on the form to put 529 and Coverdell assets that are in your child’s name rather than yours, Chany said. This is because of a glitch that will be corrected next year. But this year don’t list them.

Also, don’t include your home equity on the FAFSA, which doesn’t ask for it (although the CSS Profile does).

Benefit from divorce

If you’re divorced, only one parent’s assets and income have to be listed on the FAFSA. That’s the parent who has primary custody of a student who is under 18, or provides the bulk of support for a student who is 18 or older.

To maximize your aid eligibility, the less affluent parent ought to have primary custody in the year prior to college, Aresty said. Even if the other parent plans to pay a substantial amount toward college expenses, that parent’s finances are excluded from the formula, boosting aid eligibility. (The CSS Profile, however, asks for both parents’ data.)

Save that password

If you forget your password on most websites, you can ask for it to be e-mailed to you. But if you forget your password while completing the FAFSA form online, you’ll have to start over, Chany said. So make sure your password is something you’ll remember, or write it down and keep it in a safe place. Also note that the password is case-sensitive, so one false capital letter can do you in. When it comes to financial aid, the only thing worse than filling out the FAFSA is having to do it over.

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Kathy M. Kristof welcomes your comments but regrets that she cannot respond to every question. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For past Personal Finance columns, visit latimes.com/kristof.