STUDENTS' FEDERAL AID GETS BOOST

Students who will be attending college in 2007-08 should start
filling out the federal government's financial aid form -- even if
they filled it out last year and were denied assistance.

Congress made several changes in the federal financial aid formula
that could make some families eligible for more, especially those who
own a small business or saved money in their student's name. The new
formula also goes easier on drug offenders.

As always, filling out the Free Application for Federal Student Aid
(FAFSA) makes the student eligible for an unsubsidized Stafford loan,
regardless of income or need.

The application is used to determine eligibility for federal
financial aid including Pell grants; government-guaranteed Stafford,
Plus and Perkins loans; and work-study jobs. Many states including
California use it to decide who will get state aid. Many colleges
also use it to dole out aid from their own coffers.

The form asks for detailed information on family income and assets,
household size, and number of students in college.

Some private schools ask students to fill out extra forms, such as
the CSS/Financial Aid Profile. This additional information goes into
their aid determination.

The changes I'm writing about apply only to the federal aid
application and schools that rely on it exclusively.

In general, the federal financial aid formula assesses a certain
percentage of the student's income and assets and a smaller
percentage of parental income and assets to determine how much a
family theoretically can pay for college.

Schools subtract this expected family contribution from their tuition
and other costs of attendance to determine a student's need.

If a family's expected contribution is $25,000, a student attending a
school whose total cost of attendance is $40,000 a year will
demonstrate $15,000 in need. The student ultimately could get more or
less than $15,000 in various forms of aid including grants, loans,
scholarships and work-study jobs.

Having a second or third child in the family in college increases the
chance of getting aid, because the parents' portion of the expected
family contribution is divided among the number of children in college.

Students must submit a new or renewal application every year to be
eligible for aid.

To be eligible for federal aid for the 2007-08 school year, students
can submit an application as late as June 30, 2008. But many states
and schools have much earlier deadlines.

To be considered for state aid in California, students must submit a
federal application and a verified grade point average by March 2.

Here are some important changes to the application for 2007-08:

. Small-business exemption.

Small businesses that are majority owned and controlled by the family
no longer have to be reported as an asset, says Mark Kantrowitz, who
runs FinAid (www.finaid.com).

To qualify for this exemption, the business must have fewer than 100
employees and the household members who are included on the
application must own and control more than half of the business.

"If you have a partner and each of you owns half of the business, you
don't have more than half so it gets reported," Kantrowitz says.

He adds, "I think this is going to have a big impact on a lot of
families that own small businesses."

. Student assets assessed at a lower rate.

In general, assets held in the name of a dependent student or an
independent student without dependents will be assessed at a maximum
rate of 20 percent, down from 35 percent in years past, says Craig
Cornell, a vice president at student-loan company Nelnet.

This applies to student checking and savings accounts and Uniform
Gift (or Transfer) to Minors Act -- usually called custodial, UGMA or
UTMA -- accounts.

The maximum assessment rate for independent students with dependents
effectively drops to 3.29 percent from 5.64 percent.

Assets held in the parent's name will continue to be assessed at a
maximum rate of 5.6 percent.

. Zero assessment on certain student accounts.

In a surprising turn of events, assets held in a dependent student's
name in a qualified account do not have to be reported on the 2007-08
FAFSA -- at all.

Qualified accounts include Coverdell Education Savings Accounts,
Section 529 prepaid tuition plans and Section 529 college savings plans.

This change was probably the result of a legislative drafting error,
Kantrowitz says.

Previously, a qualified account (except a prepaid plan) in a
student's name was treated as a student asset and assessed at the
higher student rate.

If the account was in the parent's name, however, it was assessed at
the lower parent rate.

Congress probably intended to equalize these accounts by treating
them all as parent assets, no matter who owned them, Kantrowitz says.

It wrote a law saying that qualified accounts in the name of a
dependent student will no longer be considered student assets. But it
never said they would be treated as parent assets instead.

Even if Congress "fixes" this possible oversight, it probably won't
take effect before the 2008-09 school year, Kantrowitz says.

This is likely to create vast confusion and a "genuine loophole" for
some families, Kantrowitz adds.

To keep an asset off the federal application, it must be held in a
Coverdell or 529 account with a dependent student named as both the
account owner and beneficiary.

If the account is owned by an independent student or parent, it still
must be listed.

The exception does not apply to UGMA/UTMA accounts, which still must be listed.

Relatively few students own Coverdell and 529 accounts. Most
families opened them in a parent's or grandparent's name to reduce
the potential financial aid hit.

Most student-owned Coverdell and 529 accounts were transferred from
an UGMA/UTMA account.

Parents who think their dependent children might be eligible for
financial aid can take advantage of this loophole by moving money
from an UGMA/UTMA account into a 529 college savings plan in the
student's name before filling out the federal application. Then they
won't have to list the account on the 2007-08 application.

If Congress changes the law and declares all Coverdell and 529
accounts parent assets, families will still benefit from this switch
because the account will be assessed at the parent rate (maximum 5.64
percent) instead of the student rate (maximum 20 percent).

It's probably not a good idea, though, to move assets from a parent's
name into a student-owned Coverdell or 529 account for this reason
alone. Once you put money in a child's name, it remains that child's property.

. Prepaid tuition plans. A handful of states (excluding California)
offer 529 prepaid tuition plans, which let you purchase a year's
worth of future tuition (or some fraction thereof) at today's rates.

In the past, these plans were not reported as an asset on the federal
aid application. Instead, they were treated as a "resource," which
was even worse because they offset financial aid dollar for dollar,
Kantrowitz says.

Starting with 2007-08, they generally will be treated as a parent
asset unless they are in the student's name, in which case they will
be left off, as described above.

. The drug question. In the past, the application asked if students
had ever been convicted of possessing or selling illegal drugs. If
they answered yes, they could be denied aid.

The new form simply asks if the student has been convicted of a drug
offense while receiving federal student aid. A yes answer can still
result in no financial aid.

. Higher income-protection allowances for students. The federal
formula excludes a certain amount of annual income, called the
income-protection allowances, from the expected family contribution.

These allowances go up slightly this year -- to $3,000 from $2,200
for dependent students. For independent students, the allowances go
up by $1,050 or $1,700 depending on their marital status and whether
they have children.

Financial aid experts urge students to start working on the
application now, even if they were denied aid last year.

"Each one of these (changes) has a benefit that could put someone who
was on the fence into a higher need category," Cornell says.

Income data for tax year 2006 must be included on the 2007-08
application. If you haven't completed your tax return for 2006, you
can use estimated data from year-end pay stubs and submit a revised
application when you have final numbers. Asset data is reported as of
the date you submit your application.