Time to Bone Up on Financial Aid

It may not be the most entertaining way to spend the first days of 2004, but college-bound youths and adults should start filling out financial aid applications as quickly as possible in the new year.

The reason: Jan. 1 is the first day that students can apply for financial aid, and some aid is given out on a first-come, first-served basis, said Martha Holler, spokeswoman for student lender Sallie Mae in Washington.

“When it comes to financial aid, the early bird definitely gets the worm,” Holler said.

But don’t move too quickly. There are many tricks to filling out financial aid forms, and even trivial errors can prove costly. Some mistakes can cost families thousands of dollars in aid eligibility, noted Kalman A. Chany, author of “Paying for College Without Going Broke” (Princeton Review Publishing, 2003) and president of New York college aid consulting firm Campus Consultants.

“We like to tell people to make haste slowly,” he said. “You don’t get more money for being the very first person to submit the form -- especially if you make mistakes. Try to understand how your numbers influence what the aid award is going to be.”

Here’s a look at what students and parents should know about applying for financial aid:

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Deadlines

Students need to look for “priority” financial aid application deadlines, Chany said.

Each school sets its own deadline for priority treatment. Those who get applications in before this deadline are able to qualify for the lion’s share of aid.

Those whose applications are received after the deadline get whatever aid is left. Students applying to multiple colleges should look for the earliest priority deadline and apply for aid before this date.

By and large, aid applications are done only once and then shared by all of the colleges that the student is considering. Consequently, getting applications in before the earliest application deadline ensures that the student qualifies for the most aid at every school.

Financial aid applications require 2003 tax return data, but families shouldn’t wait until they’ve filed their tax returns to send in student loan forms, Holler said. Use estimated tax data where necessary and update the application as soon as new information is available, she suggested.

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The FAFSA

Student aid comes from a variety of sources, including the federal and state governments, colleges and universities, and private donors. However, applying to all of these, except for some private donor awards, starts with one application form: the Free Application for Federal Student Aid, better known as the FAFSA.

The FAFSA is a complicated, multipage application that can be done on paper or online at www.fafsa.ed.gov. It’s designed to gather information about parent and student assets and income, which will be plugged into a formula to determine the amount the federal government believes the student and his or her family can contribute to college costs.

It’s easier to fill out the form accurately if the applicant understands some basic facts about the federal financial aid formula, Chany said.

The federal formula, for example, doesn’t take into account the equity that the student or the student’s parents have accumulated in their personal residence, nor does it consider retirement plan assets.

Consequently, where most individuals would include the value of their 401(k) accounts, individual retirement accounts and home equity when asked to list their net worth on a loan application, it’s important to exclude these items when asked for net worth on the FAFSA form. To include these aid-exempt assets could cause the student to lose out on thousands of dollars in aid eligibility.

The federal aid formula also weighs a student’s assets far more heavily than assets owned by his or her parents. Specifically, $100 in the student’s name would cost that student about $35 in aid eligibility, whereas the same $100 in the parents’ name would reduce the family’s eligibility for aid by about $6.

It’s also crucial to properly account for the ownership of certain college savings accounts, such as 529 plans, Chany said. These plans are generally considered to belong to the person who puts the money in the account, not the student who spends it.

If the parents are the donors, the amount accumulated in the savings plan would count under their assets and would reduce the family’s aid eligibility accordingly. If the 529 plan was established by a grandparent, aunt or uncle, it would not get listed on the FAFSA form at all. (However, some private colleges require a second financial aid form, called the CSS Profile, that asks whether the student is a beneficiary of any 529 plan, regardless of the owner.)

It’s also worth nothing that the terms “you” and “yours” on financial aid applications always refer to the student, Chany said. Since parents often fill out the forms, they frequently err by putting in their own information rather than the information for the student, which can create serious errors on the application.

Finally, it’s important to fill out every line on the form, even if the answer is “not applicable” or zero, Holler said, because incomplete forms can be returned to the applicant.

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Aid Report

A few weeks after the FAFSA is submitted, the student will receive an aid report that notes the “expected family contribution,” or EFC. The EFC is a pivotal number because it determines the student’s need for aid.

To determine need, the EFC amount is subtracted from the total cost of any given college, including room, board, books, tuition, fees and incidentals. The gap between the cost and the amount the family is expected to pay -- the EFC figure on the FAFSA report -- is the student’s calculated need for aid.

Many colleges try to meet 100% of a prospective student’s need with a combination of scholarships, grants, work-study programs and loans. The precise combination of aid -- whether it’s mainly grants such as scholarships or mostly loans that must be repaid -- varies widely from college to college, experts note.

It’s a myth that a family of modest means should look only at low-cost colleges, Chany added. Because some high-priced colleges have large endowments to fund scholarships, families can end up paying less to finance an education at Harvard than at a state school.

Finally, it’s important to remember that financial aid applications must be resubmitted each year. College sophomores, juniors and seniors need to redo their applications, updating all the figures on income and assets, if they hope to receive aid again in the coming term.

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Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. 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 columns, visit The Times’ website at www.latimes.com/kristof.