Many families worry that their college savings accounts will kill their chances for financial aid.

It’s been my experience that it’s usually dads who get stressed out about how colleges will treat their college accounts for financial aid purposes. Some fathers whom I’ve talked are down right bitter. They are especially incensed at the possibility that families that didn’t set aside money for college will hog all the aid.

If that’s what you’re worried about, here’s my advice: Relax!

Families who save for college are rarely ever hurt in student financial aid considerations. In fact, it’s been estimated that fewer than 4% of families who fill out financial aid applications are penalized for their savings.

Why Your Savings Won’t Hurt Financial Aid Chances

Here are the two biggest reasons why saving money shouldn’t hurt your financial aid chances:

1. Colleges don’t care how much you saved for retirement.

The Free Application for Federal Student Aid (FAFSA), which anyone applying for financial aid will complete, doesn’t even inquire about retirement accounts. Private colleges that use the CSS/Financial Aid PROFILE, will inquire about a family’s retirement accounts, but schools that use the PROFILE very rarely penalize parents for these assets.

2. Parents can also shelter plenty of money outside of retirement accounts.

It might not seem like it, but colleges don’t want to strip you of all of your available cash. The financial aid formulas will also let you shield a big chunk of your non-retirement money through an asset protection allowance.

As you can see from the federal chart below, how much you can shield from the FAFSA formula depends on the age of the oldest parent. The closer the parent is to retirement age, the greater the amount he/she can shield from the financial aid formula.

Let’s say the oldest parent is 52. The family would be able to shield $49,200 in 529 savings plan money, as well as any other cash laying around in taxable accounts such as savings, checking and brokerage accounts. In a two-parent household, a 60-year-old parent could shelter $61,400 from financial aid calculations.

The amount a mom or dad could shelter in a one-parent household is significantly less. A 52-year-old single parent, for instance, could shelter $16,700.

Asset Allowance Illustration

Using an example should make it easier to see how this allowance would work. Let’s assume that a family has $100,000 in non-retirement assets, including $25,000 in a 529 savings plan, and the oldest parent is 55.

The family would get to shield $53,400 from the FAFSA formula, which would leave $46,600 unprotected. In calculating the family’s financial need, the FAFSA methodology wouldn’t expect the parents to sink all of that money into college. Consequently, the $46,600 in assets would be assessed at a parental rate of 5.46%. When you do the math, the child’s eligibility for need-based aid would only drop by $2,628 even though the family had $100,000 in the bank.

Knowing this, would you rather be a family who saved nothing for college or the family who has $100,000 in the bank? Obviously, it’s always better to save money, whether it’s for college or retirement. Do so and you’ll enjoy more options.

For parents who do have money to shelter from the federal aid formulas, 2012 did usher in some bad news. The amount of money that parents can protect has dropped. Last year, for instance, you could shelter $60,200, but the figure dropped to $53,400 this year. You can find the EFC Formula by Googling EFC Formula and 2012. You’ll find the right  chart on page 19.

Note:

When I have written about this before, some parents have believed that they subtract their asset protection allowance themselves before reporting their taxable assets on the FAFSA. Do not do this! The federal processing software automatically does this when determining what you EFC is.

Have Questions for Duke’s Financial Aid Director?

On Thursday at noon Eastern Time, Duke University’s director of financial aid will take viewer questions about paying for college. The conversation will include President Obama’s remarks in the State of the Union about student debt. Anyone can watch the webcast at no charge at http://ustream.tv/dukeuniversity. Questions can be emailed before or during the broadcast to live@duke.edu or tweeted with the tag #dukelive.

Lynn O’Shaughnessy is the author of The College Solution and She also writes a college blog for  CBSMoneyWatch and US News. Follow her on Twitter.

Join Me at My College Workshop on Saturday!

I will be holding a college workshop at the University of California, San Diego this Saturday (Feb. 4). At the Finding the Right College Workshop, you will learn specific strategies to increase your child’s admission chances, ways to evaluate colleges and universities, essential ACT and SAT information and what you need to know about  college rankings.

You can learn more here and sign up for the workshop here.

Read more on The College Solution:

How Hard Is It To Get Into College?

Qualifying for Financial Aid: How Wealthy Is Too Wealthy?

Don’t Fall for These 4 Financial Aid Myths

Many of the biggest misconceptions that people have about the college process revolve around financial aid. Now that we’re in the midst of financial aid season, I wanted to share  four  financial aid myths that are probably the most common.

1. I make too much money to qualify for financial aid.

You shouldn’t automatically assume that you won’t qualify for need-based assistance. How much income you earn is only one part of the equation. What also matters is the price of a particular college. For example, some families that don’t qualify for financial aid at moderately priced state schools may be in line for considerable help at pricey universities.

At Princeton University, for instance, families making between $160,000 and $180,000 qualified recently for an average of $26,450 in financial aid.

You can obtain an early assessment of whether your family might qualify for aid by using a free financial aid calculator. The calculator will produce an estimated Expected Family Contribution, which is what colleges would expect you to pay, at a minimum, for one year of school.

Here is the EFC calculator on the College Board website that I like to use.

Of course, you should ALWAYS use a net price calculator when evaluating your chances for need-based financial aid or merit aid for affluent students at specific  schools. See my previous post on this topic:

Playing Hide and Seek With Net Price Calculators

2. My home equity will kill my chances for aid.

Most colleges won’t care if you own a house and won’t count home equity against you if you do. That’s because the majority of schools rely on the federal aid application, the Free Application for Federal Student Aid (FAFSA), which doesn’t even ask parents if they own a home.

Colleges that use an additional form, the CSS/Financial Aid PROFILE , will inquire about a family’s home equity. With rare exception, however, these colleges will limit the amount of home equity they consider when they evaluate a family’s ability to pay. Colleges will typically impose a cap that rarely exceeds 2.4 times a family’s income, according to Paula Bishop, a smart CPA in Bellevue, Wash. who assists families with financial aid issues.

Here is the list of the 249 colleges and universities that use the PROFILE.

3. I have saved too much in my child’s college fund to qualify for aid.

In reality, less than 4% of American families who apply for financial aid are penalized for their savings. My post tomorrow will delve into this topic.

4. Completing financial aid forms is a waste of time.

Most families should complete financial aid applications, because without filing these documents, they will have no hope of receiving need-based aid nor will they be able to obtain federal college loans.

The FAFSA became available on January 1 for the 2012-2013 school year. The application should not take long if you gather the necessary documents before you sit down at your computer. You can find out what information you’ll need to complete the FAFSA by checking out the FAFSA on the Web Worksheet in advance.

The latest PROFILE is available every fall. While the FAFSA is free, the PROFILE costs $25 for the initial application and college report, and all additional reports are $16 each. Some low-income families will be eligible for fee waivers.

Join Me at My College Workshop on Saturday!

I will be holding a college workshop at the University of California, San Diego this Saturday (Feb. 4). At the Finding the Right College Workshop, you will learn specific strategies to increase your child’s admission chances, ways to evaluate colleges and universities, essential ACT and SAT information and what you need to know about  college rankings.

You can learn more here and sign up for the workshop here.

Lynn O’Shaughnessy is the author of The College Solution, an Amazon bestseller, and a workbook, Shrinking the Cost of College. Follow her on Twitter and Facebook.

The federal government has been trying for years to make the Free Application for Federal Student Aid less complicated.

It should get kudos for the effort, but millions of parents still mess up when tackling this financial aid form. But bless its heart, the federal government is trying, in what might be it’s biggest push ever, to make completing the FAFSA far less painless for the vast majority of families who wrestle with it.

What We’ve Been Waiting For

Here’s the big development, which has been years in the making: After you’ve filed your federal income taxes you can retrieve the tax information through something called the IRS Data Retrieval tool. Actually this tool was available a couple of years ago, but for reasons not worth getting into, most families weren’t eligible to use it.

With advances in IRS technology, this data retrieval tool should now be extremely helpful to most tax filers. With the click of a button, the tool will allow you to transfer your IRS tax return information to the FAFSA website to complete your financial aid form. The data retrieval feature is scheduled to be available beginning Feb. 1.

The Benefit of the New Tool

Completing the FAFSA with data directly from your IRS tax form is expected to not only make the process easier, but also cut down on errors, which should lead to more accurate financial aid awards.

If you aren’t already electronically filing your tax returns this will give you motivation to do so. That’s because once you file your tax return, the numbers in the return should be available for FAFSA purposes in one-to-two weeks. If you file a paper tax return, the data won’t be available for six-to-eight weeks.

For the first time, applicants, who indicate that they have already filed a federal tax return, will be directed to use the IRS tool. Applicants who haven’t filed yet, will be asked to use the tool once they have completed their 2011 federal tax return. The same goes for families who want to correct or update their filed FAFSA

This won’t be convenient for families who won’t get their taxes done until closer to the April 15 deadline. Unfortunately, parents typically can’t wait that long because schools often impose earlier deadlines for financial aid, as do many state aid programs.

If you file the FAFSA long before you complete your taxes, you can estimate the  FAFSA figures that require your tax return. Applicants, who estimate their taxes for the FAFSA must use the tool after they file their returns to update the financial aid application.

Who Is Eligible To Use the Tool

Here are the three criteria for using the tool:

• You must have a Social Security number
• You must have filed your 2011 federal tax return
• You must not have changed our marital status since Dec. 31, 2011

If you are married, but file separate taxes, you can’t use the data retrieval tool.

Some schools are requiring that families use the data retrieval system or are strongly recommending it.

I found a nifty tutorial on the Data Retrieval Tool on a California State University website, which I think you’ll find helpful.

Let’s hope this new tool will make everybody’s FAFSA experience a less stressful one this year!

More from The College Solution:

Measuring the Generosity of Colleges

How Does Financial Aid Work When You Are Divorced?

Financial Aid: Bait and Switch

My Upcoming College Workshop:

I will be holding my next two college workshops at the University of California, San Diego on Jan. 28 and Feb. 4. At the workshops — you can sign up for one or both – I aim to share with you ways to help you make smart decisions about picking colleges and making them more affordable. You can learn more here and sign up for the workshops here. Lynn O’Shaughnessy

Now that we’re in the thick of FAFSA season, I wanted to answer some questions on my college blog that I’ve been getting about financial aid forms. If you have your own questions, please leave them in the comment box below. Lynn O.

Mom’s question:

Try as I might I still can’t get my hands around the whole financial aid picture.  We completed the FAFSA and CSS/Profile and were amazed to see that the FAFSA family contribution amount was way more than we could actually afford! Does this mean that this is the lowest cost possible for schools with a larger price tag, merit scholarships included?

My son did apply to 2 private schools that use the institutional methodology, which I believe if admitted would give him the best financial packages.  My husband makes a good salary, but we are not homeowners and do not have much outside of our retirement plan.  Am I right about this?  Lastly, my son did apply to 1 state school that we could afford without financial aid.  At this point, we’re waiting to hear back from all the schools.

Answer:

Lots of parents are surprised when they discover what their Expected Family Contribution is. (If you don’t know what that term means, read my previous post:

What Is Your Expected Family Contribution?)

Experts have rightfully complained that the methodology used to generate EFC figures for millions of families is flawed. A family’s EFC isn’t always going to be fair. In fact, it’s quite likely that the EFC won’t pinpoint what a family can truly afford for college. And it’s no wonder. Congress decides what’s in the EFC’s secret sauce.

The formula does play favorites. The methodology, for instance, favors homeowners, aggressive retirement savers, small business owners, teenagers of divorce and rural Americans. That said, the biggest factor determining an EFC is usually the family’s income.

The FAFSA doesn’t ask if you own a home, which is great news for homeowners. Since you don’t own a home, this benefit won’t help you. The CSS/Financial Aid PROFILE does, however, ask about home equity.

Your EFC indicates what you will have to pay, at a minimum, for one year of college. Let’s say that you have an EFC of $40,000 and the school costs $40,000. That means you would not receive any need-based aid. Families with a high EFC, however, are eligible for merit scholarships from schools. For instance, the school might award a teenager a $12,000 merit scholarships, which would drop the cost from $40,000 down to $28,000. The vast majority of schools give merit scholarships to affluent students.

John’s Question

I have your book and enjoy your advice through that and other sources.  I wonder if you have any advice for someone who has very low current income but very high net worth. Our EFC is very high using the FAFSA (especially the Profile method) due to our taxable account balances and home equity.  It is close to full cost of most colleges.

Are there any schools that would not consider our assets but only income?

John

My answer:

Most schools exclusively use the FAFSA and the FAFSA does not ask about home equity of a primary home so that’s not an issue.

In addition,  if you have a lower adjusted gross income –  below $50,000 — you can qualify for something called the Simplified Needs Test, which doesn’t require that you disclose assets on the FAFSA. To be eligible for the Simplified Needs Test, you can’t file the regular federal tax return.  You must also be able to file a 1040a or 1040EZ tax form. Sometimes with high valued assets, however, capital gains could require that you file a 1040.

At some FAFSA-only colleges, however,  if you qualify for the simplified method, you will get federal aid (loans, work study and a Pell grant) for some of your award package since your EFC will be low, but for the school’s own institutional funds, (the good grant money that doesn’t have to be repaid), they look at the assets regardless of the simplified method.

While you might be able to avoid disclosing your assets on the FAFSA, you wouldn’t be able to do this on the PROFILE, which delves deeper into a family’s finances. The PROFILE is used by 249 schools that are almost all private. The five state schools that use the PROFILE for undergrads are:

• University of Virginia
• University of Arizona
• University of Michigan
• University of North Carolina
• College of William and Mary

Barry’s Question:

How about a post on the FASFA and financial aid for returning students?

Our daughter is in the middle of her first year at Oberlin, so we went through FAFSA and the whole financial aid process last year. Your blog was a big help!  Now, we are filling out our FAFSA again and while we are more experienced, there are some new wrinkles for a returning student. For example, our daughter received a generous academic merit scholarship that is guaranteed for her four years (as long as her grades are up). She is also doing federal work/study with a job on campus.

There is a section of FAFSA which asks for the student’s financial information and has a couple of questions about work study and any scholarships received that “were reported to the IRS” or some such language. This worried us until we called the college fin aid department and they explained that we did not need to fill in the scholarship received from the college itself, but we did need to report our daughter’s earnings (only a bit over 1k) in the federal work/study program.

Anyway, just an idea for you to consider.

Barry

Answer:

Thanks for the idea Barry. All work-study earnings are taxable income and must be reported as such. Students are supposed to report work-study earnings in the FAFSA’s Additional Financial Information section. The good news is that work-study earnings are excluded when determining a student’s financial need.

And just as Oberlin told you, institutional scholarships from the college should not be reported on the financial aid form.

San  Diego College Workshop

Time is running out to sign up for my next two college workshops at the University of California, San Diego on Jan. 28 and Feb. 4. At the workshops — you can sign up for one or both – I aim to share with you ways to help you make smart decisions about picking colleges and making them more affordable. You can learn more here and sign up for the workshops here. Lynn O’Shaughnessy

It’s FAFSA season so I’m going to devote at least a couple of college blog posts this week to financial aid forms.

The post today was actually written by Michael Szarek, an independent college counselor with Counseling for the Rest of Us in New Jersey.

If you have any questions about the FAFSA or CSS/Financial Aid PROFILE, just share them with us in the comment box below. I’ll try to answer them this week.

22 Facts About The FAFSA

1) The FAFSA is THE form required at all colleges that accept and award federal aid.  (Yes, there are a few that do not participate in the federal financial aid system, but these schools are rare. )

2) It’s the form that provides your college financial aid officers with the information they need to go ahead and create your financial aid package.

3) FAFSA stands for FREE Application for Federal Student Aid.

4) Hence, it’s FREE.

5) It’s available online at www.fafsa.ed.gov.  NOT dot com, NOT dot org, NOT dot anything else.

6) You can still get a paper version, if you really, really, really want to.  But you don’t.

7) It utilizes a July-to-June calendar.  In other words, we are in the middle of the 2011-2012 year and “New Year’s Day” is July 1, when we move to the 2012-2013 year.

The 2012-2013 form is available for processing on January 1, 2012.

9) The FAFSA helps determine the awarding of over $150 billion in federal aid, as well as state aid.

10) The majority of colleges also use the FAFSA to determine who qualifies for their own institutional need-based aid.

11) If you have your 1040 income tax return available, the form can be fairly straightforward.

12) Do not pay someone $1500 to fill the form out for you to “maximize your aid potential”.  Generally, the only one receiving more aid in that situation is the preparer.

13) The FAFSA is based on your current household and your current assets. What you’ve got in the bank and investment accounts on the day you complete the FAFSA.

14) But the FAFSA wants to know about last year’s (2011) income for your household.

15) If your parents are divorced or separated, it’s based on the parent you spent the most time with in the previous year.

16) And your step-parent, if there is one in that household.

17) Don’t send notes to the federal processor.  They’ll just shred ‘em.  Your concerns and questions should be directed to the financial aid office of the school you attend or are planning to attend.

18) Your parents saying that they won’t pay for College does NOT grant you independent status. To be considered independent, you have to be 24 years old, married, a military veteran or some other factors you can learn about here.

19) Here’s a link to a useful webinar about the FAFSA. (Useful, but 60 minutes in length)

20) Here’s a link to my favorite FAFSA video. (Enjoyable, only 5 minutes in length)

21) Here’s a link to my Facebook page – feel free to post any $$/FA questions you have.

22) If you have FAFSA questions, you can the federal government’s hotline at (800) 433-3243.

Read More from The College Solution:

Avoid 10 Common FAFSA Mistakes

4 Ways to Get FAFSA Help

My Upcoming College Workshop:

I wanted to let you know that I will be holding my next two college workshops at the University of California, San Diego on Jan. 28 and Feb. 4. At the workshops — you can sign up for one or both – I aim to share with you ways to help you make smart decisions about picking colleges and making them more affordable. You can learn more here and sign up for the workshops here. Lynn O’Shaughnessy

FAFSA season begins on Sunday. New Year’s Day is always the first day that parents can file the Free Application for Federal Student Aid.

While it’s been simplified in recent years, the FAFSA still isn’t what I’d call a user friendly document and it’s easy to make mistakes. Paula Bishop, a CPA friend of mine in Bellevue, WA., who fills out a lot of FAFSA forms for clients, tells me that she’s never seen any parent complete a FAFSA application without at least one mistake.  Yikes.

Here then are 10 FAFSA mistakes to avoid:

1. Don’t include retirement assets on the FAFSA. The FAFSA doesn’t care how much you’ve got in your IRA, 401(k) or other retirement accounts and doesn’t ask. The FAFSA does ask about cash, savings and checking accounts.

2. Don’t leave blank answers. If your intended answer is zero, write “0″  or not applicable. Leaving blanks can cause miscalculations and the application could be rejected.

3. Don’t enter the wrong income tax figure. Provide the federal income tax you paid or will pay based on your 2011 federal tax return — not the tax withholdings on you and a spouse’s W-2 forms.

4. List the most current marital status. You need to state what your marital status is on the day you sign the FAFSA, whether you are married, separated or divorced.

5. Don’t inflate your education. If both parents didn’t graduate from college, don’t list “college” as their highest education  attainment even if they did attend some college.  Plenty of schools treat applicants more favorably if they are considered “first-generation” college students.

6. Don’t forget to list the colleges. On the FAFSA form, you can include up to 10 colleges that your son or daughter has applied. The federal processors will send the pertinent FAFSA information to the schools on the list. You will need each college’s Federal School Code.

7. Don’t assume you won’t qualify for financial aid because your house is too valuable. The  FAFSA doesn’t even ask if you own a house so the amount of home equity you have is irrelevant. The FAFSA does ask about second homes or real estate investments.

8. Don’t assume you won’t qualify for financial aid because you have too much saved in retirement. You could have millions stuffed into retirement accounts and it wouldn’t hurt your chances for financial aid.

9. Don’t type in a wrong Social Security or driver’s license number. Double and triple check these numbers.

10. Don’t assume that you can’t file the FAFSA without a completed 2011 income tax return. You can estimate your taxes in order to complete the FAFSA, but be sure to update  the financial aid application after your tax return is complete.