Early start crucial to tackle financial aid for college

Lynn O'Shaughnessy
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Posted: Aug 29, 2006 12:00 AM

If you're the parents of a student who has just one more year to go in high school, you might be telling yourself the worst is over.

Kids who are now seniors have slogged through three years of grueling curriculum and can boast that they have survived the much-feared SAT. In their spare time, many of these teenagers have probably racked up enough volunteer hours to impress a saint. Just about all that's left for these kids is filling out the college applications, which schools will accept as early as this fall, and then waiting for fat acceptance letters.

But wait. There is the little matter of paying the bills, which unfortunately is often pushed aside until the acceptance verdicts are in.

While many students do a great job of positioning themselves to get into the best schools possible, their families often flunk a task that is critically important: Maximizing the chances for financial aid.

Mastering the college financial aid process can be far more challenging than impressing admission officers.

In one survey, 99 percent of college financial aid officers said that families don't understand how the system works. But figuring this out could determine where you can afford to send your child.

"Depending on how you answer questions on the forms - either yes or no - may affect your aid by thousands of dollars," said Kalman A. Chany, the author of "Paying for College Without Going Broke, 2006 Edition" and president of Campus Consultants in New York.

If you've got a teenager at home, the sooner you learn about how financial aid is doled out, the better your chances of grabbing free money. Here are some tips to get you started:

- Pay attention to the financial aid clock. While there are lots of ways to boost a financial aid package, you need to start planning sooner than you may think. That's because a college is going to examine your financial picture in the calendar year before your child starts college. For a child starting college in the fall of 2007, the relevant year would be 2006. If a student enters college two years from now, the critical year would be the 2007 calendar year.

What you want to do is reduce the appearance of income and assets in the first critical calendar year. During this 12-month period, you should avoid, if possible, selling mutual funds, stocks, bonds and other investments that could generate capital gains that can hurt in the aid calculations.

If you have a car loan or you carry a balance on your credit card, consider paying it down. By eliminating debt, you'll reduce the amount of cash in accounts that you have to report on your financial aid forms. If you're anticipating a year-end bonus, see if you can arrange it before the start of your base year.

- Fill out aid documents early. Surprisingly, completing financial forms isn't that onerous. In about an hour, you should be able to finish the Free Application for Federal Student Aid, which must be filled out to be eligible for any federal aid. You can complete the Web-based version by visiting www.fafsa.ed.gov. Even if you think there's zero chance you'll qualify for aid, fill it out anyway. Some private colleges and universities won't award merit scholarships to a child without a FAFSA.

The FAFSA is sent to federal processors, who determine each student's expected family contribution, or EFC. The EFC refers to the amount of a family's income and assets that it is expected to use for college. A college will determine its aid offer based on the EFC and the school's price tag.

You'll use your latest income tax return to help answer FAFSA questions. It's best to file the FAFSA in January, if at all possible, but that requires getting your income tax return done early. If that's unrealistic, you can estimate income tax figures on the financial aid form.

What's the rush? Plenty of colleges want this document as soon as mid-February. If you dally, your aid application might not be processed or it could be reviewed after the aid money has been dispensed.

"Missing a financial aid deadline is worse than missing a mortgage payment," Chany said. "Your bank will probably give you another chance; the colleges probably will not."

Many private colleges will also require families to complete the CSS/Financial Aid Profile, which the College Board administers. Schools use this form to decide whether a family qualifies for their own aid money. You'll find the Profile form on the College Board's Web site (www.collegeboard.com).

- Know what assets matter. "All too often families who qualify for aid assume that they won't, and families who don't qualify for aid assume they will," said Mark Kantrowitz, author of "FastWeb College Gold, The Step-by-Step Guide to Paying for College," as well as the founder of FinAid (www.finaid.org), a great Web site for financial aid information.

A common misconception among parents is that they will blow their chances for financial aid if they've got lots of money sunk into retirement accounts.

Schools, however, aren't going to consider retirement money, nor will they care about cash-value life insurance or tax-deferred annuities.

Families who own pricey homes also shouldn't assume that financial aid is an impossibility. The FAFSA doesn't even ask about the family home. The Profile does consider the value of a house, but some colleges will cap the amount.

- Know the rules about divorce. If a student's mom and dad are divorced, a family will face different rules. Colleges are only going to be interested in the custodial parent's finances. The FAFSA form doesn't even inquire about the other parent. The profile does ask about the noncustodial parent, but the information isn't used in the calculations.

Remarrying, however, can hurt chances for financial aid. If the custodial parent marries, the assets of the new spouse will be counted. Some couples try to block this from happening by signing a prenuptial agreement, but it won't help. The aid formula, Chany said, also depends on a curious definition of custodial parent. If a child lives the majority of that critical calendar year with the mom, then she's the custodial parent. If the child spent more time with the dad, then he's the guy who has to fill out the financial aid forms. It makes no difference to the colleges which parent is legally considered the custodial parent. Go figure.