Mistakes can cost you on college aid
By Sandra Block
By Sandra Block
The Greek historian Xenophon once observed that "fast is fine, but accuracy is everything." That's good advice for knife throwers, and it's also pertinent if you're planning to apply for financial aid for a college-bound child.
To qualify for federal financial aid, as well as state aid and grants from many colleges and universities, you must file a Free Application for Federal Student Aid, or FAFSA. The Education Department began accepting applications for the 2007-08 academic year on Jan. 1. Financial aid experts typically urge families to file as early as possible. This year, though, it's important to take your time. Otherwise, you might overlook recent changes in the law that could increase your chances of getting financial aid.
The biggest change concerns the way state-sponsored 529 college savings plans are treated. The Deficit Reduction Act of 2005, signed into law in February 2006, clarifies that 529 plans are considered the parents' asset for purposes of calculating financial aid — even though their dependent child is usually named as the beneficiary. Likewise, the law states that prepaid college tuition plans and Coverdell education savings accounts are the parents' assets.
The distinction is crucial because student-owned assets can torpedo your child's eligibility for financial aid. In calculating how much a family can afford to pay for college, the federal formula for the 2007-08 school year counts 20 percent of assets owned by the student. For parent-owned assets, the maximum assessment is much lower: 5.64 percent.
Under the new law, custodial 529 plans owned by a dependent child aren't counted at all, says Joe Hurley, founder of Savingfor College.com. Custodial 529 accounts are usually created when parents transfer a Uniform Gifts to Minors Act account to a 529 plan. (UGMA accounts allow parents to invest in mutual funds, stocks and other securities on behalf of children who can't legally invest on their own.)
Hurley believes the treatment of custodial 529 plans is an unintentional loophole that Congress will eventually close. But even if it does, custodial 529 plans will most likely be treated as the parents' assets, he says.
Kalman Chany, author of "Paying for College Without Going Broke," worries that many families will inadvertently report 529 savings plans, particularly those in custodial accounts, as student assets on their FAFSAs.
Families may also miss a change in the law that affects small-business assets, Chany says. Parents who are business owners are no longer required to report the company's net worth on the FAFSA if the business is family owned and controlled and has fewer than 100 full-time employees.
The government rarely corrects FAFSA errors that reduce the amount of aid a family is eligible to receive, Chany says. "A few mistakes could cost you thousands of dollars."
TIME IS YOUR ALLY
Check the deadlines for the schools your child is interested in attending. A handful of private schools impose January deadlines for FAFSAs, but most schools don't require you to send in your financial information until February or later, Chany says.
While it's important to meet deadlines, you're usually not rewarded for filing early, Chany says. Taking your time will reduce the chance of making a costly error. There are other benefits to waiting, including:
The size of your assets could decline in the first few weeks of the year. When you fill out the FAFSA, you report income based on the prior year's income tax return, in this case 2006. But you're supposed to report your assets and liabilities as of the date you sign the form.
For that reason, if you know you'll have to pay some large bills early in the year, you may be better off waiting to file your FAFSA, says Rob LaBreche, president of consumer marketing for College Loan Corp. Paying those bills will reduce your assets and possibly increase your eligibility for financial aid.
You may want to transfer an UGMA into a 529 plan before applying for aid. UGMAs, and their cousins, Uniform Transfer to Minors Accounts, are still considered the child's assets in the financial aid formula, which means they'll be assessed at 20 percent. One way to solve that problem is to convert the UGMA to a 529 custodial account, in which case it won't be counted at all. But this step shouldn't be taken unless you're confident it will increase your eligibility for aid, Chany says.
Here's why: To make the transfer, you'll first have to liquidate the UGMA and pay capital gains taxes on any investment gains. If you make the transfer after Jan. 1, the gains won't be included in your 2006 income, so it won't affect the income you report on this year's FAFSA. But you must file the FAFSA every year if you want to continue receiving financial aid. So capital gains reported in 2007 could reduce the amount of aid your child receives next year.