Myth #2: "If we own our home, we won't qualify."

Under federal guidelines, your home equity is not considered an asset. What is important, however, is that you find out how each of the colleges on your list calculates the amount they assume you can pay.

The question you need to ask is: Do they use the federal or the College Scholarship Service (CSS) method? Under the CSS method, your home equity does count. If you have lots of equity built up and lots of consumer debt, you'll get less aid. But here's a tip: If you pay off your consumer debt with a home equity loan, your net worth decreases and the amount of aid you're eligible for increases dramatically.

Colleges are interested mostly in your income, whether it's from salaries or investments. If you own rental property and make a profit from your renters, that counts for more than the value of your home does.

Dolan Smart Money Move: It's a very bad idea to sell stock or property and put the money into a bank account in the year before you apply for aid. In the application process, the college will calculate your "expected family contribution" (EFC), which is determined by factoring in your income, including income from investments and other assets, minus your financial obligations. The college subtracts your EFC from the total costs of a typical year–factoring in tuition, living expenses, books, and room and board. Then they decide whether they want to help you with the difference.

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