Released: December 26, 2006

Common and costly college loan mistakes

Source: Sandra Block, USA Today

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 will begin 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, 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% of assets owned by the student. For parent-owned assets, the maximum assessment is much lower: 5.64%.

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