Kirk Kinder, CFP was featured on TV discussing the 7 Mistakes Parents Make on the FAFSA (the Free Application for Federal Student Aid). You can find the video at http://tinyurl.com/aulgsx2
1. File early: Often times, student aid is on a first come first served basis. If you delay applying, you could miss out on student aid. The deadline for the FAFSA is June 30th, but many states have different deadlines. Maryland, for example, has a March 1 Deadline. Start the FAFSA now even if you don't have your taxes done yet. You can estimate these figures then finalize them when your taxes are done. Make sure you get your taxes done as soon as possible. Don't wait until April 15th.
2. File even if you think you won't get aid: many families with higher incomes don't file the FAFSA because they believe they won't get any aid. That is not always the case, especially if your child is looking at a private school or you have more than one child in college.
3. Pay down debt with savings: The FAFSA looks at your annual income (tax return) and your assets. If you have money in a bank or non-retirement investment account and you have credit card debt or an auto loan, pay those debts off. This will increase the amount of aid you might receive. Also, if you have been thinking of doing a home improvement or buy a car, this is a great time to pay cash for those expenses to reduce your assets for the FAFSA. Just make sure you don't use the FAFSA as an excuse to buy a new car you really don't NEED.
4. Appeal aid decisions: If you have a big one time tax item like a bonus or stock option exercise, this will impact your eligibility for aid. However, you can appeal your aid decision to the school stating that your income was abnormally elevated due to this one time bonus or option exercise. The school will often change the aid award.
5. Minimize tax items: Since the FAFSA is based off your tax return, you need to do some strategic tax planning. Some ways you can do this is avoiding big capital gains, don't take distributions from retirement plans, contribute the maximum to your retirement plans, utilize cafeteria plans at work (FSA, insurances, etc.), and look at using Health Savings Accounts for the annual deduction.
6. Get Assets out of Kids Name: The FAFSA looks at the parents and child's assets and income. The parents are expected to contribute 5.6% of certain assets to college expenses while the student's rate is 20%. Move assets to the parents name to increase your potential aid. If your child has a savings account with substantial assets, open a 529 plan. The 529 can be owned by the parent with the child as a beneficiary.
7. Don't make radical changes to your assets: Many financial salesmen exist that push parents to high commission products like annuities and permanent life insurance to reduce their asset calculation on the FAFSA. It is true that annuities and permanent life insurance balances are not included in the FAFSA, but these instruments have material impacts on your future retirement and tax situations. Often, I find the only one who really benefits from major shifts like this are the salesmen.