Happy holidays everyone!
While I’m spending Christmas with family in Colorado, I decided to share this post about avoiding mistakes when completing the Free Application for Federal Student Aid. Parents can start filing the FAFSA beginning January 1.
If you missed it, here is another post I shared about the FAFSA earlier this month:
Getting Ready to Tackle the FAFSA
I wish that I could reassure you that completing the FAFSA is easy, but it won’t be for many parents. Even more disconcerting is that parents make mistakes all the time and don’t even realize it.
Some of the mistakes in this post may seem obvious, but others will probably surprise you. Here are 12 FAFSA mistakes to avoid:
1. Reporting an incorrect household size.
This one might seem puzzling. After all, parents should know who lives unde
r their roof, but it’s not that easy. Here are some reasons why:
If a stepparent has children from a previous marriage those children could potentially be included in the household size even if they don’t live in the residence. They would qualify as household members if the parent provides more than half of his or her support and will continue to do so during the financial aid award year.
A parent should also include an unborn child on the FAFSA, if the baby would be born before the end of the award year and will receive more than half of the support from the student or parent. There must be medical documentation of a current pregnancy.
Parents can also include other relatives, such as grandparents, grandchildren or aunts or uncles, if they currently live in the household and will be doing so between July 1, 2015 and June 30, 2016. These dates correspond with the federal financial aid season for the 2015-2016 school year.
Parents also wonder if they can include older children who are now in graduate school when reporting household size. You can include these grown children in the household size if you are providing more than half of their support. Keep in mind that student aid, including scholarships and loans, will count as student support so this is a higher hurdle than you might assume.
2. Not filing the FAFSA.
Many parents assume that they won’t qualify for need-based aid so they don’t even bother wrestling with the form. This is
a huge mistake because families often have no idea whether they will qualify for financial assistance.
Parents will sometimes wonder if they should not seek financial aid for their child’s freshman year but make the request before the child’s sophomore year. The thinking it this might help them get into the school and then seek aid once the child has a year under his/her belt. I once had a parent, who had saved $70,000 for a private college education, ask me about that approach.
I told him that delaying the request for aid until the second year would be a poor idea. What if the child received a mediocre package that was simply stuffed with loans for her second year of college. Can you imagine parents having to tell a child that he/she will have to leave for a cheaper school because they can’t afford it?
When parents need financial aid, they should apply up front.
3. Filing the wrong FAFSA.
It’s easy to make this mistake because for much of the year, two different FAFSA forms are available online. Parents who are submitting the FAFSA for the school year that started this past fall should submit the 2014-2015 FAFSA. (This would include students who are starting college in January.) The 2015-2016 FAFSA will be available on January 1 for students who start school on July 1, 2015 or later.
My son started graduate school in mid June 2014 so he had to complete the 2013-2014 FAFSA. If the summer school had started on July 1, he would have completed the 2014-2015 FAFSA because that is the date when the new federal financial aid season starts every day. If you are confused about which form to complete, ask a school what application to use.
4. Reporting the wrong assets.
The FAFSA asks about the student and parents’ investments, but you should NOT include any qualified retirement assets such as Individual Retirement Accounts, 401(k)’s, 403(b)’s, KEOGH, SIMPLE, pension plans and annuities. The FAFSA is interested in your non-retirement accounts, which would include checking and saving accounts, brokerage accounts that could include mutual funds, individual stocks and bonds and certificates of deposits.
It’s also critically important to report 529 plan savings as a parent asset. If you report this money as the child’s assets, the financial aid formulas will treat this more harshly.
5. Reporting home equity.
Parents should also not include equity in their primary home on the FAFSA. Families, however, must report the equity of other real estate.
Rental property is usually considered an investment and not a business. It’s an important distinction since the aid formula treats business assets less harshly. To be considered a business, the real estate must be part of a formally recognized business. A hotel is a business while renting out a home, timeshare or room is generally considered an investment.
6. Sharing the wrong name.
The federal government is very picky about the names that filers share on the FAFSA. Students and parents must provide the legal names that are on their Social Security cards. A filer, for instance, shouldn’t use Jim on the form if his legal name is James. If the Social Security Administration has a woman’s maiden name on file, she must use that name until she’s updated the Social Security Administration with her married name. If the names don’t match up, the government won’t process the application.
7. Not expressing an interest in a work-study job.
A student who says he is interested in a work-study job on the FAFSA isn’t obligated to obtain one later, but students need to answer in the affirmative to be eligible. At some schools, most or all of the campus jobs are reserved for students eligible for work-study.
8. Lying on the FAFSA.
For parents who are considering lying on the FAFSA in hopes of getting financial aid, it’s not only a bad idea, it’s a crime. The federal government selects one-third of FAFSA filings for verification each year and colleges may select additional aid applications for review. In fact, some colleges verify 100% of their applications. Lying on the FAFSA can generate fines of up to $20,000 and up to five years in prison. Also the family could face repaying all their financial aid.
9. Failing to list all colleges on the FAFSA.
Families are permitted to list up to 10 schools on the FAFSA. If a parent or child fails to include any schools, these institutions will not receive the financial information that the FAFSA generates. And that means the student wouldn’t be eligible for need-based aid from an overlooked school. If you are applying to more than 10 schools, the parents can add additional names after they have received their electronic Student Aid Report (SAR) from the federal government.
10. Listing schools in order of preference.
Keep in mind that each institution on a student’s FAFSA will be able to see all the other schools that a student is applying to. Some institutions, no one knows how many, use the order that a student lists his or her schools to help make admission and financial aid decisions. Your best bet is to avoid tipping your hand and simply list the colleges alphabetically.
11. Sharing the wrong marital status.
It’s easy to make this mistake if a parent’s marital status has changed. The FAFSA requires that parents note what their marital status is as of the day the FAFSA is filed. So if the parents were married in 2014, but they separated by the time the 2015 FAFSA was filed, the financial aid form should state that the parents are separated.
This rule is different from what the IRS expects. In this same example, the estranged parents would file their federal income taxes for the 2014 calendar year as a married couple.
12. Not knowing who should file the FAFSA
Who should file the FAFSA may seem like it should be straightforward, but it often won’t be. Here is the breakdown of the rules about who should file:
Traditional Married Couples
If you are part of a traditional family — married husband, wife and kids – it’s easy to answer who completes the financial aid forms. Both 
parents will share their financial information on the FAFSA.
Unmarried Parents Living Together
Unmarried parents who live together have traditionally enjoyed a FAFSA perk. Only one of the parents has had to complete the FAFSA and share his/her financial figures, but this has changed. Both parents, who live together, are now required to complete the financial aid application jointly.
A Parent Has Died
If a parent dies during the year, do not include his or her financial information on the FAFSA. If the parent has died after filing the FAFSA, contact the school immediately with this information.
Divorced and Separated Parents
If you are divorced, the ex-spouse who has taken care of the child the majority of the year will continue to complete the FAFSA. You are considered the custodial parent, with the responsibility of completing the FAFSA, based on where the child has physically lived during a 12-month period ending on the day the FAFSA is completed.
Separated parents don’t have to be “legally” separated to be treated the same as divorced couples, but they can’t be living in the same residence.
Here is a post that I wrote about a California teenager of divorced parents that will give you some examples of divorce strategy:
Financial Aid and Divorce
Here is a video I did awhile ago on this subject:
YouTube video: Divorce and Financial Aid
Single-Sex Couples
A new federal rule requires that married, single-sex partners must both include their financial information on the FAFSA. To reflect this change, the FAFSA will now ask for information for “Parent 1″ and “Parent 2.” In the past, only the biological parent had to share his or her assets and income.
What if the single-sex couple is not married? Both partners will have to submit financial data if one of them has adopted the other partner’s child. If a partner has not adopted the child, only the biological parent will complete the FAFSA.
Here is a story that I wrote for my CBS MoneyWatch blog last year on this rule change:
Feds Push Diversity in Financial Aid
Guardians
If the student is living with a legal guardian, such as a grandparent or an older sibling, the student is considered an independent student. The federal government does not consider a guardian (or foster parent) a parent. As such, the student will only include his or her information on the FAFSA.
Any support a legal guardian or foster parent gave to the student should be reported on Worksheet B as the student’s income.
Trying to accept my sons financial aid but it says he needs to provide proof of students marital status because it doesn’t match and he needs to get a signed copy of his spouses transcript. He is 18 not married never was last years went without a hitch any suggestions
Does providing and paying for healthcare for example medical, dental, and vision coverage qualify as expenses when it comes to household size?
If I am re-married to a Canadian citizen (step parent to my children) who still resides in Canada, do I need to report her income on the FASFA? I am the custodial parent. We have separate households.
Author
Yes, you have to report your spouse’s income on the FAFSA.
Lynn O’Shaughnessy
I am 18 and me and my parents filled out fasts together and everything was paid for but I want to move out because it’s not good at home and I’m marked as independent on fasfa so does that mean everything will still work out or do I have to live with my parents to actually get to go to college
I filled out my sons financial. Aid incorrect I thought I needed to add up my government assistant. So he was supposed to receive 7,000 and only got 1,476 family of five with 350 monthly
Hi, I will be graduating high school on June 2, 2017 and so I will not be in college for this school year but when I answer the question “How many people in your mother’s household will be college students between July 1, 2016 and June 30, 2017? Do not include your parents.” with the number zero it says it is not valid even though no one in the household is not going to college.
Would a veteran living with her parents be considered dependent or independent?
A veteran would be considered independent regardless of where she lives.
Lynn O’Shaughnessy
Hi, my question is in regards to my parents’ marital status. They have been legally divorced since 2010 but they live together and file taxes jointly (they also have a business). What would I have to select as their status?
Here is my understanding of the FAFSA rules – because they are living together even though they are divorced, they must both include their income and assets on the FAFSA. Parents whether they are married or not must include both their income and assets when living in the same household. This is a fairly new rule change.
You can call the FAFSA hotline for specifics on what to mark on the aid application since parents who are divorced but continue to live together and file taxes together is unusual. https://studentaidhelp.ed.gov/app/home/site/fafsa
Lynn O’Shaughnessy
My question is in regards to the custodial parent. This year I understand I am the custodial parent, and make less income than my ex, and I should be the one to file. Next year, my ex would technically be the custodial parent with my student living closer to him at college. I also will be selling a home and getting married and my new husbands income would definitely effect my EFC. Can we switch the filer of the FAFSA after the first year, or must the same parent be considered the “custodial parent” for all years of filing for aid?
The current system is flawed. Two households making $100,000 per year each have a child. One household lives below their means, saves and invests prudently. The other household lives beyond their means and generates large amounts of debt. Now comes the Expected Family Contribution exercise, which both households complete. The household that over spent and accumulated large debt ends up with a much lower EFC.
The systems penalizes the conservative and responsible household…….The system is flawed!
Hi Tim,
I’d have to disagree with you. Debt doesn’t impact a family EFC. Parent saving is assessed at 5% – in some cases it’s not assessed at all because of a federal protection asset allowance. The families who have saved are in vastly better shape than those that don’t.
Lynn O’Shaughnessy
They are in better shape, I agree, but not because of the system. A 5% penalty is still 5%. If the EFC exercise (including FAFSA) doesn’t consider debt, why are questions concerning debt asked?
My questions pertains to #4 above. I am presently filling out the FAFSA and have come across the section requiring information on retirement savings plans and pensions. The actual FAFSA statement asks you to report ‘Payments to tax-deferred pension and retirement savings plans (paid directly or withheld from earnings), including, but not limited to, amounts reported on the W-2 Form in Boxes 12a through 12d, codes D, E, F, G, H, and S. Don’t include amounts reported in code DD (employer contributions toward employee health benefits)” I have amounts in ‘AA’ & ‘C’, and my wife has a small amount in ‘D’. From your statement in #4, you use the word ‘asset’ as opposed to contribution amount, so my understanding here would be that the amounts are required. I don’t see why the FAFSA is asking for this, if they are qualified amounts though, and that is really my question.
I am wondering how UTMA accounts are catalogued in the FAFSA application. Are they parental assets or do they belong to the child?
Hi Max,
Unfortunately, UTMA accounts and other custodial accounts are considered the child’s assets. If the money had been in a 529 account they would be assessed at the parent’s lower rate.
The FAFSA assesses UTMA accounts at 20% and parent assets at no more than 5.64%.
Lynn O’Shaughnessy
Lynn,
Thanks for the clarification but that leads me to ask: Can the TMA accounts be transferred to 529 accounts? Or can our daughter transfer those accounts over to us when she reaches 18 (which will be at the beginning of her senior year?).
We met with a certified college funding specialist who suggested we had too much money in stocks to get FAFSA help and not to bother to submit. Is there a threshold amount?
Hi Kathy,
There is no threshold amount. It depends on how much the school cost, how generous the school is and what your Expected Family Contribution is, which takes in many factors. You could have an EFC of $40,000 to $50,000 or more and still qualify for need-based aid at very expensive elite schools. And, of course, retirement assets don’t hurt financial aid chances.
Lynn O’Shaughnessy
I am a high school counselor and we are now trying to reach out to parents and students about FAFSA. In fact, my school is hosting a financial aid night next week. I think the problem starts with parents as well as reporting the wrong information. I feel parents need to be educated. It is hard for my school to get more parents involved. Students come to the counselors for everything regarding financial aid for college; meaning students actually asked counselors to fill out their financial aid application. We always tell them it is based on income and we do not have access to their parents information. Then we invite them out to financial aid night where we have a financial aid representative come out ans walk students and parent through the process. We have computers available and parents can bring pertinent information. I am amazed at the number of parents who attend. Not very many parents show up and later call the counselor for help.
Hi Natalie,
That’s really a shame that so few people attend your financial aid event! Making mistakes on the FAFSA can be extremely costly.
Lynn O.
Hi-
My husband is an a equity partner at his law firm. Do we have to include the value of his ownership when the FAFSA asks “What is the net worth of your parent’s current business.” He owns less than 50%.
How do you fill out FAFSA if you only have one parent because you were adopted by a single woman who never married? This was common with international adoption in the 90’s and now we are college age.
Thanks for these reminders, Lynn.
As a long-time reader whose oldest college student is now contemplating grad school, I was intrigued by the reference to your son’s grad school FAFSA (in #3 above). In the new year, might you write a post (or posts) for parents like me who are clueless about the financials of grad school? I imagine I am not alone as someone who would really benefit from and appreciate your insights about this.
Have a wonderful holiday!