There are many myths about financial aid and they persist and intensify the stress surrounding the application process. Assistance falls into two different categories: need-based and merit-based aid.

Federal Financial Aid is entirely need-based. Universities can provide aid from their own resources, based on need as well as merit. 

The first step to applying for financial aid is filling out and submitting a FAFSA (Free Application for Federal Student Aid) to each school that the student plans to attend. The earliest it can be submitted is Jan. 1 of the year the student will attend college.

The information submitted on the FAFSA lets schools determine need based on expected family contribution and calculates it using a straightforward formula:

cost of attendance - expected family contribution = financial need

The expected family contribution is the minimum amount a family is expected to contribute for a particular year. Of course not all schools meet 100 percent of a family's need as determined by the formula.

The expected family contribution is based partly on whether the amount is attributed to the parents or the student. Families often try to shift income and assets to appear less wealthy, lowering their expected contribution, and boosting their aid package. For example, withdrawing money from the bank or from their brokerage accounts, which must be listed on the FAFSA and moving that money into an annuity, which doesn't have to be disclosed on the FAFSA.

However, the formula places a much higher emphasis on earnings than it does on assets, so as not to penalize those who have saved for college over the past years. 

Just 5.4 percent of parental assets that must be listed on the FAFSA are deemed available to pay for college (after an asset protection allowance of $45,000 to $50,000, depending on the ages of parents).