College / financial aid

[farmerEd]

Wondering if anyone has ideas on the best way to maximize qualifications for getting financial aid for college?

I have 4 kids, first won't be going for another 11 years. I am young, and retired, and I have enough to live on for sometime...hopefully until I die...BUT, with private colleges going for as much as $40K per year, times 4 years, times 4 kids, that adds up to some real serious dough. ($640K in todays dollars, probably a million plus in 11 years).

My gut tells me that if I have a million dollars sitting in my checking account when the time comes, my kids will go to college and I will pay a million dollars to the schools....on the otherhand, if I have no money in my checking account when the time comes, my kids will STILL go to college, but at significantly less costs...

You see what I am getting at...

What are the rules as far as what assets are considered and are not considered as far as college aid goes? Does a house count? retirement money? etc.

Got plenty of time to think about it, but want to start planning early!

Thanks.

 

[Bob_Smith]

It has been a few years since I've been through this, but here's what I recall:

--House does NOT count
--Assets in retirement plans do NOT count.
--Assets in taxable accounts DO count.
--Income counts (per 1040).
--The child's assets count more than the parents' (so keep $ out of the child's name.
--Any $ put into a retirement plan during the year is added back to income.
--If the child is starting college next fall, (ie: 9/2004) they look at 2003 income.

But the bottom line is that you will not likely qualify for need based aid if you're FI. That leaves scholarships and good grades definitely pay. My older daughter started college in 1993 and got through debt free - and I paid a total of $7,000. We shopped around for a good state school that wanted good students and was willing to pay for them. She's working on her PhD now and makes more money than I ever will.

My younger daughter is also a good student. I plan to pay $20,000. She will work part time and contribute about $12,000. The school has already knocked off $24,000 due to class rank. When it's all said and done, she'll probably have a small debt, but maybe not because I've yet to factor in the tax credits. Also, look into 529 plans.

Good luck. Hope this helps. My info is a little outdated though, so someone please correct me if any of this is wrong.

 

[sgeeeee]

I have no kids, so you might choose to ignore my inputs based on that fact alone. But I would think that one of the best things you could do for your kids is to get them involved in funding their own education.

I don't want to sound like one of those old farts who walked 20 miles in the snow to school each day, but I did fund most of my undergraduate education and all of my graduate education. It really wasn't a hardship, it was highly rewarding.

As an udergraduate I did compete and win a scholoarship that paid my tuition and fees plus part of my book budget each semester. That helped me a lot. Then I worked 20 hours a week in dishrooms and the university book store and I also worked in the coal mines in the summer (good money for hard work). I could have made it through my undergraduate program on that money alone, but my parents were thrilled to see me in college and they did provide part of the rent each month. I lived a good life and got through without debt. Certainly, there were weeks when I had difficulty balancing the need to solve Physics problems with the need to eat next week, but that also offered valuable lessons.

As a graduate student in engineering, I was actually paid to do research while completing my degrees and made enough money performing half time R&D work to pay for all of my MS and PhD education. Again, it was a good life filled with lots of important lessons -- not a burden.

You may be more affluent than my coal mining father and housekeeping mother and may be able to offer your kids greater support. But I don't see why it should be a requirement to pay for it all. Just get them started down the path toward saving, studying and working. I would think that leading them toward earning their education might be the greatest gift you could give them.

 

[wzd]

My stepdaughter is starting this process now. I would look at www.fafsa.com and http://www.fafsa.ed.gov for some FAQ type links. What Bob says above is right on target.

The item you probably want to research is the "EFC" or expected family contribution. First, 35% of the students reported assets are expected to be used for the next year expenses. Then a percentage of parents income and assets are used. Home and retirement assets are excluded (this may be a mortgage payoff consideration....there is another thread going on this), and 12% of assets are added to your income. Then a chart is used to get the expected contribution for that income level.

The document http://www.fafsa.com/downloads/2004-05_FM_tables_1-8-2004.pdf has excruciating details on this.

One gotcha to watch out for. Education IRA's are counted as students assets, and subject to the 35% number. But since you can roll them over between beneficiaries, there are some games you can play.

Wayne

 

[cute fuzzy bunny]

I don't want to sound like one of those old farts who walked 20 miles in the snow to school each day

You only had to walk TWENTY miles to school? Heck, we had to walk THIRTY in 10 feet of snow and it was uphill...BOTH WAYS. Of course, before we could walk to school we had to clean up the house. This was tough because we couldnt afford floors so we had to sleep while clinging to the window sills. After cleaning up our floorless house we ate hot gravel for breakfast, walked to school, and on our way home stopped to work two 9 hour jobs to be able to afford the hot gravel breakfasts and new shoes we wore out walking to school.

Ok, thats it. I'm done.

 

[sgeeeee]

. . .  After cleaning up our floorless house we ate hot gravel for breakfast, walked to school, and on our way home stopped to work two 9 hour jobs to be able to afford the hot gravel breakfasts and new shoes we wore out walking to school.

WOW! Were you ever lucky? We had to eat cold gravel.

 

[cute fuzzy bunny]

Many a day we YEARNED for cold gravel, but we could only afford our floorless hovel because it was positioned over a volcanic vent.

 

[unclemick]

Boy - I feel sorry for you guys. Nothing but "Happy Days'-freeloaded at home for two years going to JC transferred to State University(U of W, go Huskies) and spent the money earned over four summers as a lumberjack(1) and pulling the greenchain for 'big factory wages'. One summer as lab tech paid less.

Used the second family car (stock but 'cool' 37 chevy coupe) to cruise the drive inn and go to dances at thr union hall (pulp and sulfite). Aah the good old days - I was really 'rich' then.

 

[Telly]

I have no kids, so you might choose to ignore my inputs based on that fact alone.  But I would think that one of the best things you could do for your kids is to get them involved in funding their own education.

That reminds me of that old joke about the Pope that got so many people worked up years ago...
"He no playa the game, he no maka the rules!"

True, true!

Without all the years of children expenses, ER should be easy!

I put myself through school 100%. I worked in factories, some dirty and pretty dangerous, some ok. While going to school full or part-time. Saved up enough $ to finish it off without working for the last terms. But factory jobs were available then, and they paid a lot better than retail, etc. Those jobs are by and large, GONE! Flipping burgers or making tacos at minimum wage ain't gonna cut it.

Read recently that the typical 4 year college student graduates with something like $19k of student loans to pay off.

The basic document for financial aid is the FAFSA. You can run through all the worksheets, forms, etc. and come up with the EFC, as wzd said. Then look at the Pell Grant Table to find the intercept between EFC and the cost of that college. If we set it to worst case with the EFC down at 0$, and set the cost of attending the school as high, the most the student will get as a Pell Grant is about $4,000 for that year. So anything else will be loans, not grants.

Bob_Smith has listed what counts and what doesn't. That is correct. Even if the parents wages income was $0, the taxable investments you hold will kick you out. We went through all this just recently, just as a check. We did this to confirm/disprove what a friend told us years ago about financial aid. He was correct.

 

[TheFIREman]

You might also want to look at institutions that offer co-operative education programs. I went to one and graduated with enough cash to buy a new car (I was clever, not wise). The basic idea is that you go to school for four months, then, with the aid of the university, get placed in a degree-related job for 4 months. The pay isn't fantastic but it is better than Burger King. When you graduate, not only do you have cash and no debt, but you also have a couple years relevant experience which is a big jump on all the other new grads. The only downside is that it takes an extra year to graduate.

 

[farmerEd]

Thanks everyone that responded. Lots of good advice.

I actually hope my kids will gravitate towards a community college or nearby state school instead of setting their eyes on a Harvard/Yale/Duke types schools which I personally question the value of attending those schools on a cost/benefit basis.

I am a product of a state school (UMass Amherst) and completed dual degress while I was there(BS in computer science and BBA in Management). Paid for it 100% by myself by working FT the last 2 years of highschool (that was tricky) and then PT while in college. I would hope I can get my kids to follow the same example. I beleive you get out of college what you put into it. And after my first job, nobody cared what school I went to; only what I did on my last job....

The fafsa.gov website has lots of good info, so thanks for that. It seems like getting the money into the house and retirement accounts is the way to go. Need to look for creative ways to maximize retirement money and minimize taxable accounts. With 11 years to go shouldn't be too hard...

Good tip on not putting too much in the kids names...

Also, how does the Govt verify the information you give them? I would imagine it would be too easy to lie on the applications and people would be too easily tempted (not me), I assume you need to provide tax forms etc, but do they verify the forms you give them with the forms actually filed with the IRS? Also, how does one determine someones financial assets? If you own a vacation home in palm beach, but don't declare it, how would they know? Also, if your assets are spread across multiple brokerages etc and you listed 3 of the 5 you had, how would they find out? Is there a central repository for this info someplace?

(Mind you, I am NOT planning on lying or illegally hiding anything, just trying to figure out how the whole system works...honest. I like to be able to sleep at night).

I DO plan on do everything *legal* that I can to maximize aid opportunities though and I figure the more you know about how the system works, the more opportunities there are to legally work within the "system".

Thanks all. Great site. Glad I found it recently.

 

[unclemick]

All the yucks aside, I'm guess college is a whole new ball game compared to when I went(1960's). Education has outpaced general inflation for quite a while now and with eleven years to go it probably is not too early to start planning.

With no children, I can only root from the sidelines. Good luck.

BTY-my sister(6 yrs. younger) drove the politico's in Vermont nuts and got three kids into the Naval Academy. The alternate route out of Dodge(our small logging town) was The Armed Forces and their tech schools were probably better than a lot of colleges - again very dated info. Working and going to school - internet plus seeing the prof. once a week or so (usually MBA types but some undergrad.) was popular at my last temp, job - Lockheed (mid 90's).

Again - a whole new ball game - Good Luck.

 

[John Galt]

Some comments re. college. My experience is the
same. I have only a 2 year degree from a local junior college, paid 100% by me. During my career, I was president of four (4)
corporations before I retured in 1993. Once you have experience, it makes very little difference what school
your degree came from.

As for financial aid, I am a pretty creative guy. But,
I could never figure out how to get any need based
financial aid for any of my kids. Back in the 80s, when my first was ready to start college, a good friend with
slightly older children told me not to bother as I would
never get any. I tried anyway. He was right.

John Galt

 

[farmerEd]

You may be right, that given my circumstances, need based scholarship may not work. I do still want to figure out how all the details work to present myself in the "worst" position when it comes to applying.

I am still curious, if anyone knows, how the govt verifies the info you give them? For example, a friend of mine's daughter is heading off to college this fall. Last year they borrowed $150K against the house to do some renovations, so they put the money into the bank until it was spent (progress was slow so the money sat their for a while). All of a sudden college aid forms needed to be filled out and they have all the cash sitting there...bad news...and they wanted to either accerlate the spending of it, or "hide" it somewhere else...but it CAN"T be as simple as they spend the money, show the "empty" bank account and cry poor is it?

Wouldn't the govt look back for average balances or something? There must be safeguards in there somewhere...

 

[John Galt]

Hello farmerEd. I feel your pain man. I still have one
in school (college sophomore) and even though I only
pay a small portion it still hurts.

I don't know how (or if) the government checks all of
that stuff you report on financial aid forms. All I know
is I studied it, got real creative (without telling lies) and
I couldn't even come close. And............back then
I had 3 kids at home, at least 2 mortgages, lots of other debt and a low net worth. Maybe things have changed
but I doubt it. Good luck with it though.

John Galt

 

[wzd]

FAFSA claims to audit 30% of the applications. How they audit I don't know, but your tax return is a starting point. It seems like a high percentage to me. The penalties are severe if caught lying, so maybe they count on that.

Also, I'm not sure if the game will be worth it in the big picture. You will have to evaluate the other tax aspects of tax deferred accounts and taxable accounts as well. The current dividend and capital gain tax laws are a boon for taxable accounts, which pulls in the opposite direction of sheltering all in retirement accounts.

I think playing a shell game with education IRA's is legal though. You can rollover between beneficiaries once per year. I first thought of doing it to avoid complications with tax matters on our stepdaughter, who is claimed on her fathers return, but it may have other uses.

Wayne

 

[Bob_Smith]

FarmerEd, I'm not sure if someone else has already provided this link, but it allows you to apply what-if scenarios to the financial aid process. Just enter in the minimum you think you could squeeze your taxable accounts and income down to. You'll probably find your EFC is still off the charts.

http://apps.collegeboard.com/fincalc/efc_welcome.jsp

Also, something not too many people are aware of is a process referred to as "special circumstances". The director of the financial aid office has the authority to revise your EFC downward if you can provide convincing evidence that it overstates your ability to pay. I helped a friend do this when her husband died. She ended up qualifying for aid. I tried it myself in 1993 and was turned down. I appealed to the university president. He was reluctant to overrule the financial aid director, but said, "tell you what, how about I give your daughter a job in my office?" I accepted. That job changed her life. It led to a permanent job at the university after she graduated, which led to an even better job after she got her masters degree. Now she is getting her PhD. You never know what people will agree too. My total out of pocket costs for her were $7,000. So the figures you see (a million per child, etc.) are probably way overstated.

 

[Jack]

The `special circumstances' route worked for me as well, when we applied for financial aid for our son the year after I took my early retirement settlement (which doubled my salary the year we were applying for aid). Explaining in an attached letter that my salary was artificially doubled for that year only - and, in fact, my salary was virtually going to disappear altogether - worked, and he got some nice scholarship assistance.

Oh, and it sounds like you went to UMass some time ago, farmerEd. After living in MA and getting acquainted with the UMass system for the past 15 years, I'd reevaluate before pushing your kids there. Sure it worked for you (& has for tons of others as well) but that was then, and this is now. IMHO, UMass isn't all it's cracked up to be - or was!

Then again, I've always been a believer in the `you get what you pay for' concept.

 

[Ted]

I actually hope my kids will gravitate towards a community college or nearby state school instead of setting their eyes on a Harvard/Yale/Duke types schools which I personally question the value of attending those schools on a cost/benefit basis.

Based on having attended both public and private universities of varying levels of "prestigiousness," my opinion is that the major difference in them is not in the quality of the instruction, but rather in the "quality" of the majority of other students. The contacts that a person establishes in college are often of some benefit in their professional and personal life after college, but are certainly not THE determining factor in their level of happiness.

A lot of really smart, successful people have attended non-prestigious universities. One good example is the president of MIT, who graduated from the U. of West Virginia. Another is a recent president of the United States who graduated from some little college in Illinois (well, at least he was successful).

I'd say that going to a "prestige" college is like driving a BMW. If you have so much money that it won't detract from other things that you want, then fine. But for most people, it really isn't cost-effective.

One of the "political" implications of this view is that minorities are not being "deprived" if they are not granted preference in admission to "prestige" universities. The fact that all such universities have financial aid targeted towards lower income students tends to automatically benefit racial/ethnic groups that on the average have lower incomes.

Despite the fact that the process of applying for financial aid has become standardized to some degree, selecting a college can still be approached like shopping for a car (BMW or other). There is a lot of room for negotiation as to the "deal" that each college will offer a particular student -- particularly if the student offers some form of "diversity." If intelligent life is discovered on Mars, I'm sure all of the universities will be competing to attract the first Martian students.

 

[unclemick]

Speaking of Martians and other stuff - has anybody run the analysis where you invest the kids college money in a trust fund for when they ER at say age 40 - after sending them out into the cold cruel world to fend for themselves?

Stanley and Danko's book/s and the power of compound interest come to mind.

 

[cute fuzzy bunny]

I read an article on that recently, maybe i'll go look for it...basically espoused setting up a retirement account for your kids rather than a college fund. Even a modest amount set aside for 60+ years will make for a sizeable retirement nest egg. The argument was that many kids that want a college education can qualify for scholarships or aid of some kind, work their way through school or take out a loan. Not to mention many will live well without a college education. However given the rate of people who retire "on time" without enough to live on, that "gift" is considerably more valuable.

 

[wzd]

Bob Smith - Thanks for the link. It computes the same thing I computed using the fafsa site spreadsheets (but a lot easier) - that I'm SOL for any aid because an apartment building that generates ER money is worth too much. Maybe we can plead special conditions....worth a try, but sounds unlikely to me.

RE: ER funds for kids/grandkids. Sounds like a great idea, but I wouldn't want them in the kids name. If there is a way to create them, tax deferred or free if possible, in a trust as UncleMick mentions then that would be interesting. I have heard too many cases of people losing inheritance monies in legal procedings, such as divorce or by being sued. There would also be the temptation to pay the penalty tax and spend it. Some kind of trust not under their control that paid out starting at age 40 would be better. If it could be hidden from them (and creditors) that would be even better.

Wayne

 

[woolybully]

FAFSA claims to audit 30% of the applications.  How they audit I don't know, but your tax return is a starting point.  It seems like a high percentage to me.  The penalties are severe if caught lying, so maybe they count on that.

Also, I'm not sure if the game will be worth it in the big picture.  You will have to evaluate the other tax aspects of tax deferred accounts and taxable accounts as well.  The current dividend and capital gain tax laws are a boon for taxable accounts, which pulls in the opposite direction of sheltering all in retirement accounts.

I think playing a shell game with education IRA's is legal though.  You can rollover between beneficiaries once per year.  I first thought of doing it to avoid complications with tax matters on our stepdaughter, who is claimed on her fathers return, but it may have other uses.

Wayne

I did the FAFSA thing last year and am totally disillutioned about it. It asks a lot of personal questions that my lawyer wouldn't ask. I was audited. Had to send in tax form - fun since I did it electronically.

My daughter graduated HS with 4.11 average and a 1280 SAT. They "Offered" me a loan of $1300/year for a college (out of state) that was going to cost me $22000/year. No thanks. No merit scholarship. One friend in her grad class had over $150000 in scholarship money - 5 times what it was going to cost her to actually go.

Then the school raised tuition 16% last year and bragged that out of state was paying 4 times what in state paid and perhaps the out of state should pay 5 times. Schools look at out of state students as a source of income. That practice of the disproportionate level of out of state tuition costs only serves to limit diversity of students at school and that will hurt. Private schools don't have that problem.

I've had the opportunity to work with people from around the world and the ones from Europe and Asia all seem to be better educated. The american education system is in trouble, from elementary to college and it's not going to be a easy or quick to fix. It will take a generation to fix and no one is looking at the problem.

It would have been better and more cost effective to spend the recent medicare money into the education system.

Sorry for the rant.

 

[John Galt]

Hello wzd and all. I feel your pain about the cost of higher education (and the results). However, I don't
believe it would make any difference at all if the money
added to Medicare was diverted to education, or anywhere else. My view? Once the government
(at any level) gets their hands on your money, the chances are quite good that it will be wasted. In God
we trust! All others (and especially government)
are suspect. The scary part is that someone said
"The power to tax is the power to destroy!" The
country of our founders is certainly gone. I predict
what's left will be killed off in time.

John Galt

 

[unclemick]

Is'nt it ever thus. One of the founders - James Madison cpmplained about taxing broadly and spending narrowly. I beleved New England was going to secede early on but the British burned Washington before the delegation got there (around 1812 or so ). I remember southerner's in the lumber mills who put down George Washigton and his dam 'Whisky Tax'.

Today we have spreadsheets and stmulation models so we can measure how bad we're screwing up in super detail.

AND as an American - nobody is going to cheat me out of the shear joy of complaining - no matter how good it gets. BTY - my 87 yr. old mom is still ready for the Great Drepression to return,