College Savings Category
Dear Liz: As an avid reader for years I have never felt as compelled to write as I did after reading your column regarding college financing. I disagree that college financial aid is based primarily on income or that “typically [parents are required to] contribute less than 6% of eligible assets.”
We filed a Free Application for Federal Student Aid for our daughter, and our expected family contribution was calculated at $43,000. The school offered my daughter just $2,000 in work study, at a university with a $38,917 annual tuition. Our combined income is $175,000 and our liquid savings (not including retirement accounts) is $145,000.
We could pay 6% of our income (about $12,000) or 6% of income plus savings ($19,000) per year without taking loans, but not $38,000. I have attended several “paying for college” seminars and found their estimated contributions quite sugar-coated compared with the reality.
Rather than paying 6%, is the reality 25% of our income? Please let me know if we have done something wrong, and how to rectify it.
Answer: The 6% limit on eligible assets is not a cap on how much you’ll have to pay for college. As the original column said, income weighs more heavily in financial aid calculations than assets, and your income is high.
The federal financial aid formula assumes families with high earnings have more disposable income to pay for college than lower-earning families. The formula also assumes high-income families have had ample opportunities to save for college, whether or not they actually have.
You could use the net price calculator on the college’s website to see whether your liquid savings are having an effect on your expected family contribution. At some schools, using savings to pay down a mortgage or other debt could result in a lower expected contribution.
But you still might not get aid, even if you could move the needle on your expected contribution. Many colleges “gap” their students by not supplying enough aid to meet all their needs. And while some private colleges offer merit (rather than need-based) scholarships to attract the children of wealthier parents, top-tier schools tend not to, because they know they can attract excellent candidates without such help, said Lynn O’Shaughnessy, author of “The College Solution: A Guide for Everyone Looking for the Right School at the Right Price.”
Even if your family doesn’t have financial need according to the formula, your daughter is still eligible for federal student loans of as much as $5,500 in her freshman year. Federal student loans are flexible debt with fixed interest rates and many repayment options, so they shouldn’t be feared, especially in reasonable amounts. If, however, you would have to borrow much more, and that borrowing would interfere with your plans for retirement or other financial goals, you probably can’t afford this school and need to start looking for colleges you can afford.
Dear Liz: You write about it not being a good idea in many cases to pay off your mortgage, but does it make sense to do so to reduce savings so that we can be in a better position to help our high school junior get financial aid for college in a year? We also have a 529 and some investments and are savers.
Answer: Your income matters far more to financial aid calculations than your savings, said Lynn O’Shaughnessy, author of “The College Solution: A Guide for Everyone Looking for the Right School at the Right Price (2nd Edition).” Another important factor is how many children you have in college at the same time. If you have a high income and only one child in college, you may not get much or any help, regardless of how your assets are arranged.
Many schools ignore home equity when figuring financial need, however, so it might be worth running some numbers. You can do that by using the net price calculators included on every college website. Pick the schools your junior might want to attend and run two scenarios on each calculator: one with your current financial situation and another in which you’ve paid off your mortgage with your savings.
Many parents are overly worried about how their savings will affect potential aid, O’Shaughnessy said. Parental assets, including 529 accounts, receive favorable treatment in financial aid formulas. Your retirement assets aren’t included in the federal formula at all, and your non-retirement assets are somewhat shielded as well thanks to an “asset protection allowance.” The older you are, the more of an asset protection allowance you get. The allowance will be somewhere around $45,000 for a married couple in their late 40s, the typical age for college parents. For those over 65, the allowance is $71,000. Beyond that, you’re typically asked to contribute less than 6% of eligible assets toward your offspring’s education each year.
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“If you can save for college, you probably should.”
That’s the mantra I’ve chanted in columns, speeches and interviews over the years. An article in today’s Wall Street Journal shows a lot of upper middle income parents aren’t listening, gauging by the amount of student loan debt they’re taking on. What the Journal found:
- Among households with annual incomes of $94,535 to $205,335 (80th to 95th percentile of all households), 25.6% had student-loan debt in 2010, compared to 19.5% in 2007. Among all households, 19.1% had education debt in 2010 compared to 15.2% three years earlier.
- The amount borrowed by upper middle income households rose to $32,869 from $26,639, after adjusting for inflation.
- Fat student loan bills are no longer an anomaly. More than three million households have a student loan balance of $50,000 or more. That compares to about 794,000 in 2001 and less than than 300,000 in 1989, after adjusting for inflation.
The Journal threw in another statistic: More than one in three households with incomes of $95,000 to $125,000 who had a child entering college in 2011 didn’t save or invest for that child’s education, according to a survey by Human Capital Research.
Here’s the deal: A child’s financial aid package will be based in large part on what the parents earn. If they have a six-figure income, or close to it, the kid won’t get much help. Colleges expect that if you have that much income, you should have been saving some of it for education–whether or not you actually did.
Even families with lesser means could find they’re getting a lot less help than they expected, with much of it coming in the form of loans rather than grants.
Either way, that means the parents, the kid or both could be taking on a lot of debt.
The Journal suggested that this burgeoning debt may lead more families to more carefully consider cost and value when considering colleges, something that “could make it difficult for all but the most selective schools to keep pushing through large tuition increases.”
We’ll see about that. In the meantime, if you’re lucky enough to have a decent income, consider putting at least some of it aside for your kids’ educations. Do it even if you won’t be able to pay for everything, or you want your kid to be mostly responsible for the cost. Every dollar you save is a dollar your child–or you–won’t have to borrow later.
Dear Liz: I opened Uniform Transfers to Minors Act savings accounts for my two boys (now 7 and 10) when they were newborns. I chose not to go with the 529 college savings accounts because I didn’t like the restriction that the money had to be used for education. It has always been my intention to use these funds for college, but if they choose not to go to college, then it could be used to help them purchase their first homes, for example.
I’ve been squirreling away a couple hundred dollars each month in each account, but I read a few of your previous pieces and think maybe the UTMA accounts were not the best vehicle for this. Could they one day just demand the money and do with it whatever they want?
Answer: The short answer is yes. In most states, the money will become theirs at age 21 to spend however they want, although a few states let them have it at 18.
The other big disadvantage to custodial accounts such as UTMA and UGMA (Uniform Gifts to Minors Act) accounts is that they’re counted as the child’s asset in financial aid calculations. That can substantially reduce the amount of aid they get.
But even more important than the financial details is your attitude. You need to give up this notion that not going to college is a reasonable option for your kids. In the 21st century, some kind of post-secondary education is all but a necessity for a person to remain in the middle class, labor economists tell us. Your sons don’t have to study at a four-year school, but they are likely to need at least some vocational training beyond high school.
If you want to reduce the effect of these accounts on any future financial aid packages, you have a couple of options. One is to spend the money before they get to college, although that’s probably not the route you’ll want to take, given how much money you’ve already saved. If the accounts were smaller, you might just use them to buy a computer, pay for summer camp or cover the cost of tutoring. Such expenditures are allowed as long as the money is spent for the benefit of the child and doesn’t pay for expenses that are your obligation as a parent (food, shelter, clothing, medical care).
Another option is to liquidate the accounts and invest the cash in 529 plans. This would dramatically reduce the money’s effect on financial aid calculations, since it would be considered your asset rather than your child’s. The money could be withdrawn tax free to pay for qualified higher education expenses. If it’s not used for higher education, the contribution portion of the withdrawal won’t be taxed as income, but any earnings will be, plus there will be a 10% federal tax penalty on those earnings.
If you decide to transfer the money, the 529 account should be titled the same way as your UTMA accounts, said Mark Kantrowitz, publisher of the college planning website FinAid. Ownership of the account shifts to the child when he reaches the age the UTMA account would have terminated. That gives him control of the money if it’s not spent on education, but he would have had that anyway. You can read more about the details at http://www.finaid.org/savings/ugma.phtml.
Dear Liz: When my cousin and I were children more than twenty years ago, my grandparents opened a college savings account for each of us. I have no idea what kind of account this was, or where it was located. My grandfather passed away a few years later. While I was in high school, my grandmother informed me the investments had not done well, and she was closing the accounts. I received a check for $500 at high school graduation that was supposed to be the balance of the account. I assumed my cousin received the same, until she recently posted on a social networking site she was thankful her grandmother started a college fund when she was young that covered the entire cost of her education. I am furious at my grandmother, and now believe both accounts were cashed out and given to my cousin. Without knowing anything about the accounts, except that one was intended for me, is there anyway to find out what actually happened to the money? And would I have legal recourse to try to recoup the money, since my grandfather intended it for me?
Answer: Your cousin has at least two grandmothers. Have you considered the possibility she wasn’t referring to the one you share?
If your cousin left no doubt in her post, there’s still not much you can do. If your grandparents opened custodial accounts, such as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, then legally the money was yours and shouldn’t have been transferred to your cousin, if that’s in fact what happened. But your grandparents simply may have opened accounts in their own names that they informally earmarked for college educations. In that case, they could have done anything they wanted with the money.
Even if you had records proving the money was yours and it was wrongfully transferred, the idea of taking legal action against a family member should give you some pause. Since you have no such records, you’re pretty much at a dead end. You can ask your grandmother about this, or simply let the matter rest as one of the mysteries of family life and move on with your own.
Dear Liz: What recourse would my 21-year-old nephew have if his mother embezzled his college fund? The fund was set up by his parents when he was a child.
Answer: If your nephew wants to try to sue his mother, or file a criminal complaint against her, he should talk to an attorney about his options. Money that’s placed in a trust or custodial account for a child’s benefit is no longer the parent’s to take, although too many parents don’t understand this and grab at an easy source of funds when money gets tight.
In the more likely case that he doesn’t want to take formal action against his mother, he could simply ask her to return the money she took. His chances of success may not be great — people who steal from their kids may not be eager to make amends — but he likely stands no chance if he doesn’t ask.
Dear Liz: I have an 18-year-old daughter who wants to attend a private, out-of-state school. I don’t have any money saved for her education and do not make enough to cover the cost of this college. What are my options? She’s an A student and is planning to go to medical school.
Answer: You need to have the conversation you probably should have initiated a few years ago, before she started the college application process. She must understand that what she wants and what you can afford to provide for her may be two very different things.
Start by applying for financial aid at the colleges that have accepted her (let’s hope she applied to more than one). The “estimated family contribution” calculator at FinAid.org can give you a rough idea of what you’ll be expected to pay, but the actual package you’re offered can vary somewhat depending on how much the school wants your daughter to attend. You may want to invest in some books to help you understand the process, such as the Princeton Review’s “Paying for College Without Going Broke, 2012 Edition” and education expert Lynn O’Shaughnessy’s workbook, “Shrinking the Cost of College,” available at thecollegesolution.com.
Once you have the financial aid offers you can see which schools may be within your grasp and which are too expensive. Some schools encourage students and their parents to borrow heavily to attend, but that can lead to financial disaster — particularly since she has so many years of schooling ahead. Your daughter should try to limit her borrowing for her undergraduate education to what’s available through the federal student loan program (typically $33,000, total) and avoid private student loans, which have fewer consumer protections.
You as a parent can borrow through the federal PLUS program, but it’s easy to go overboard. The PLUS program will lend you up to the full cost of your daughter’s education, but the loan payments could be overwhelming and could prevent you from retiring. Student loan debt is almost impossible to discharge in bankruptcy, so you should be cautious about taking it on.
Your daughter should be able to cobble together an affordable education if she’s flexible about where she gets her undergraduate degree. Beyond that, she should know that the military and the National Health Service Corps pay for medical school in exchange for several years of service.
Dear Liz: I have some very important questions regarding my son who is going to be attending a private university next year. He is going to be a student athlete (he golfs), which does not help very much financially. We’re shocked at the cost and do not have enough saved. We were counting on selling our home and downsizing to pay for his education, but got caught up in the real estate downturn. We need some help and advice on how we can get access to the free money that I know is out there. We also have two other boys, 13 and 6. We will start immediately saving for their college.
Answer: The “free money” you know is out there may not be the answer to your problems.
Yes, there are scholarships your boy might get to help pay for his education. But if he receives any financial aid from the university, those scholarships may reduce the amount he gets in grants — another form of financial aid that doesn’t have to be paid back.
If, on the other hand, he doesn’t get any grants, the scholarships could reduce the amount of loans he’d otherwise need to take out. He can start his search for scholarships at FastWeb.com.
You definitely should apply for financial aid from the university, if you haven’t already. (FinAid.org’s estimated family contribution calculator can give you a rough idea of how much you’ll be expected to chip in, although the school’s actual package may differ somewhat.)
Then take a hard look at what this education is going to cost you. You may not be able to afford it. If you would have to stint on your retirement, or your son would have to borrow more than the federal student loan limits ($5,500 for his freshman year), you probably need to look for other alternatives.
One option is for your son to live at home and attend a two-year college to get some of his requirements out of the way. Another is an in-state school, or one with a golf team that wants him badly enough to offer a better merit-based package of aid. FinAid.org offers resources and ideas for getting an affordable education, as does college expert Lynn O’Shaughnessy’s workbook, “Shrinking the Cost of College,” available on her website, TheCollegeSolution.com.
What you don’t want to do is bankrupt yourself, or consign yourself or your son to huge student loan debts. No education is worth a lifetime of debt, particularly when other options are available (and you have two other kids to educate).
Dear Liz: What are some good possible resources for loans and other financing to pay for school? I am going back to school to try for my degree and I am pretty strapped for cash even though I work full time. Any suggestions would be appreciated.
Answer: Don’t go back to school to “try” for a degree. Go to get one. A college education is economically useless if you don’t get that sheepskin.
The financial aid education site FinAid.org is a great resource. You’ll find an “estimated family contribution” calculator that will predict how much you’ll be expected to pay for your education and how much financial aid you can expect. You also can learn about federal student loans, which are available to just about everyone and which have reasonable, fixed rates and numerous consumer protections, including income-based repayment plans. Try to avoid private student loans, which have variable rates and few of those protections.