Whether or not high school seniors already know where they’re headed to college this fall, it’s time for their parents to do their homework. The same goes for families whose children will be returning to campus.

Filing the Free Application for Federal Student Aid (Fafsa)—preferably, as soon as possible after January 1—is necessary to be considered for financial aid from federal and state government and from most colleges and universities. This includes grants, loans and, even, sometimes, merit-based aid. Many private schools also require students to file the College Board’s CSS/Financial Aid Profile application.

Although the federal deadline for filing the Fafsa for the 2015-16 academic year isn’t until June 30, 2016, many states and schools have deadlines in early 2015 and some award aid on a first-come, first-served basis, says noted financial aid expert Mark Kantrowitz, co-author of the book Filing the Fafsa and senior vice president and publisher of Edvisors.com, a website focused on planning and paying for college.

Even families who think they are too wealthy to qualify for free or subsidized aid or who were previously turned down should file the Fafsa, he says. According to the 2011-12 National Postsecondary Student Aid Study (Npsas), 11.3% of students whose parents earned $100,000 or more received need-based grants from their colleges and 18.9% received non-need and merit-based grants, he notes.

“It’s very difficult to predict how much aid a student might get from year to year,” says Kantrowitz. One factor that can strongly impact this is the number of siblings enrolled in college, because the Fafsa-calculated Expected Family Contribution (EFC) is divided by this figure. The other factor is the price tag of a particular school.

“If there are two kids in college,” he says, “that’s almost like having half as much income.”

For example, if a family has an EFC of $29,000, a student might qualify for some need-based financial aid at a private non-profit college that charges $50,000 to $60,000 per year but not at a public college charging half that, he says. With two kids in school, each child’s EFC might drop to $15,000, which, he says, could make them eligible for some need-based aid even at a public school.

Wealthier families are filing the Fafsa at a similar rate to the middle class. According to data Kantrowitz pulled for FA from the 2011-12 NPSAS, the filing rate among U.S. families with children seeking bachelor’s degrees is 72.0% for those with adjusted gross income of $200,000 to $249,000, 73.2% for $250,000 or more. This compares with 72.8% for families earning $50,000 to $99,999 and approximately 69.7% for those in the $100,000 to $199,999 brackets.

To be sure, the Fafsa, which requires over 100 data elements and takes an hour to complete, is intimidating to families, he says. “The sad thing is, I wrote a 250-page book to help people complete a six-page form,” he says. “That shows you how complicated it is.” The book is downloadable for free in PDF format at Edvisors.com. It is also available for purchase in paperback and Kindle formats at Amazon.com.

Form Fundamentals
Kantrowitz, who in 1996 provided the U.S. Department of Education with a prototype implementation of an online Fafsa, encourages families to file the form online because of faster processing, built-in edit checks and skip-logic functionality. This means respondents aren’t asked questions that don’t apply to them.

Parents don’t have to file a 2014 tax return before submitting the 2015-16 Fafsa. But if they estimate their income, they must update the Fafsa when they do file their tax return. Using the IRS Data Retrieval Tool to transfer data from federal income tax returns to the Fafsa may reduce the likelihood that a student’s Fafsa will be selected for verification of data that was reported, he says.

Two big changes to the Fafsa starting with the 2014-15 award year involve parent relationships. First, same-sex couples legally married in a state where same-sex marriage is recognized must file the Fafsa as a married couple. Previously, same-sex parents were treated as divorced. From a financial aid perspective, “It’s a little bit of a mixed bag,” says Kantrowitz, since they may have to pay more for school.

Second, any student’s parents who live together, even if they are divorced or were never married, are now treated as married and both must report income and assets on the Fafsa.

Watch out for grandparent-owned 529 college savings plans. Their distributions are reported as untaxed income to the beneficiary (the student) and can reduce need-based aid eligibility by as much as half the distribution amount, says Kantrowitz. In contrast, a 529 plan owned by a dependent student or parent is treated as a parent asset and is assessed, at most, by 5.64%, he says.

For example, a $10,000 distribution from a grandparent-owned plan could reduce aid eligibility by as much as $5,000, while $10,000 in a parent-owned plan could reduce eligibility by a maximum of $564, he notes. “It’s important in their desire to help that they don’t accidentally reduce or eliminate their grandchild’s ability for need-based aid,” he says.

Derek DeLorenzo, senior vice president of client relationship management at Ascensus College Savings, which administers 31 different 529 plans in 17 states, says that if grandparents do hold 529 plans, it’s best for their grandchildren to hold off on withdrawing assets until they will no longer be applying for financial aid. This would be in their senior year of college, unless they are applying to graduate school.

As for a Uniform Gifts to Minors Act (UGMA) account, he says, it is considered a parent asset if it is invested in a 529 plan but it is considered the child’s asset if it is invested in stocks and bonds.

Early Planning
Parents of younger children should also tune in. Understanding what goes into the expected family contribution and how schools consider this can help them position their assets and steer their kids toward institutions that may offer more attractive aid. It can also help families to better balance the triple threat of saving for education, a home and retirement.

“You’re not going to get loans or scholarships for retirement,” says Beth Walker, a financial planner with the Wealth Consulting Group, a Las Vegas-headquartered RIA firm, and founder of College Funding Coaches, a Colorado Springs, Colo.-based firm that assists in all aspects of college planning. “In a perfect world, we’d talk to parents as soon as their kids are born to optimize planning.”

Instead, she says, most families are unaware that the Department of Education determines the dollar amount it thinks they should be shelling out for college.

Walker holds workshops at schools and offers “1,000-foot level” individual consulting sessions with attendees to explain their expected family contribution, their likelihood of qualifying for aid and some strategies they can use. “They may never engage us,” she says, “but after 30 minutes on the phone, they know where they should be starting.”

To help pay for college, one family she spoke with took $100,000 out of their home by refinancing and parked it in a money market fund. “They thought they were doing the right thing,” she says. Instead, the assets, assessed at 5.6%, added $5,600 a year to their EFC and made them ineligible for financial aid. Multiplied by eight (two kids, four years of school each), it’s a $44,800 mistake. “Ouch,” she says.

Meanwhile, she says it might make sense for a wealthy business owner to consider shifting some income to a child in college because students who can demonstrate they provide half their support are permitted to file their own tax return, in a lower tax bracket than the parent, and may be eligible for tax credits.

Stuart Canzeri, who runs the college planning division at Peachtree Financial Group, an Atlanta-based RIA firm, says it’s critical to understand the expected family contribution before filling out the Fafsa. “Most families come in like an ostrich with their head in the sand,” he says.

Peachtree uses proprietary calculators to show parents of high school sophomores and juniors what their EFC is and what it could potentially be. “It’s not much about financial repositioning,” he says. “It’s about redirecting families to what schools to look at based on their EFC.”

A family with an expected family contribution of $30,000 should not be looking at a $60,000 school if that school doesn’t meet most of that difference with institutional grants, he says. “If anything else, we’ve broken the family for retirement,” he says.

However, he notes, as Kantrowitz discusses in Filing the Fafsa, that a student’s EFC is calculated differently under the federal methodology used by the Fafsa and the institutional methodology used by the CSS/Financial Aid Profile. State schools rely on the federal methodology and private schools may select either, says Canzeri.

He coached one family on how to fight for a private school to use the institutional method, which yielded an EFC of $22,000, instead of the federal method, which calculated it as $33,000. The family was successful and their child ended up going to Dartmouth for $22,000 out-of-pocket, just $1,000 more than the University of Georgia sticker price, he says.

Dartmouth, he notes, had actually calculated a lower EFC using the consensus approach methodology, a set of common standards for determining a family’s ability to pay for college, which is used by Dartmouth and the 22 other members of the 568 Presidents’ Group. The group, an affiliation of colleges and universities that admit students on a need-blind basis, is named after Section 568 of the Improving America’s Schools Act of 1994, which gives member institutions a safe harbor to meet and discuss common principles of financial aid without violating antitrust laws.

Both he and Walker stress the importance of selecting the right college. “It was an aha moment when I realized just how much the student has to do with the total cost of school,” says Walker, noting that more than half of all students take six years to earn a four-year degree.

This spring, the Department of Education is replacing its Federal Student Aid PIN system with passwords to improve security. PINs and passwords serve as electronic signatures and should not be shared, says Kantrowitz—even with financial advisors. “It’s like giving away not only your pen,” he says, “but your entire hand.”

Meanwhile, advisors who help clients file the Fafsa are subject to the same penalties for fraud as the family, he says, including fines of up to $20,000 and five years in jail.