Student loans: Hit a bull's-eye with your FAFSA

@Money February 6, 2012: 8:38 PM ET
student loans FASFA

(MONEY Magazine) -- If you have a child headed off to college this fall, you've got an important item on your to-do list: the Free Application for Federal Student Aid (FAFSA), which you can submit as early as Jan. 1.

The number filed for the past year was up 11% to a record 21 million, while the budget for federal aid increased by only 7% and funding shrank in many states.

This year the competition could be even stiffer. So know these things before you file:

You can be too early

Contrary to popular belief, there's no advantage to filing on Jan. 1, says Kal Chany, author of "Paying for College Without Going Broke."

While early birds do generally get bigger helpings, colleges don't begin reviewing aid applications until after their priority filing deadlines -- typically Feb. 15 for private schools, March 1 for public. Most states start March 1 or after. Illinois, Kentucky, Oregon, South Carolina, and Tennessee are the exceptions; in those states aid is first come, first served, so shoot for early January.

Everywhere else, aim to file by the school priority deadlines and use the extra time to do your 2011 taxes. Estimating those for the FAFSA can backfire.

For example, your year-end pay stub may not account for 401(k) contributions, causing you to overstate your adjusted gross income. And every $10,000 you add can reduce aid by $4,000, according to FinAid.org. While you'll eventually have to follow up with your 1040, by the time any mistake is corrected, you may have missed out on some aid.

Never say never

A third of families with college-bound students don't submit FAFSAs, and nearly half of them say they didn't think they were eligible for aid, reports lender Sallie Mae.

Questions about paying for college? Send them to The Help Desk.

"But almost every family qualifies for some form of assistance," says Haley Chitty of the National Association of Student Financial Aid Administrators. For example, you must fill out the FAFSA to access low-interest federal loans -- like the Stafford, which anyone can get. As of last fall, you must also file for parental PLUS loans. Some schools require the FAFSA for merit awards as well.

Strategy doesn't always pay

Since the amount and type of aid you receive is based in part on your assets -- excluding retirement -- some experts recommend spending down cash before filing. But the federal formula assesses parental assets at 5.65%, so using up $1,000 of savings cuts your expected family contribution by only $57.

Anyway, $35,000 to $60,000 of your assets are sheltered, depending on the age of the older parent. A student's assets, however, are levied at 20%. So better to spend your kid's cash, or move it to your name.

MONEY magazine is researching an article on ways to reduce the financial pain of college. We're looking for families that can talk about new and creative ways that they're raising cash for college and cutting costs while they're there. Sound like you? Tell us your story and you might even get your picture in the magazine! E-mail Beth_Braverman@moneymail.com. To top of page

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