Is college aid process biased against prudent savers?
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Anonymous
| We came into enough money when our kids were young (through employer stock options) to pay full freight at even a high priced college. We put the money in 529s rather than taking lavish vacations, buying a bigger home or second home, fancier cars, etc. etc. Does this mean that we will be expected to pay full freight while folks with big mortgages and car loans and extravagant lifestyles will get a discount? Oldest is a sophomore so we are new to the college process. Just curious how the financial aid thing works. Also, if you have multiple kids in college at once, is that factor considered, or are you expected to liquidate assets to pay? |
Anonymous
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It's definitely biased against people who save specifically for college -- that's why most financial planners advise you to max out retirement savings first.
But frankly, if you have enough income that it becomes an exercise in where to "hide" it, you shouldn't be applying for FA to begin with. |
Anonymous
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We are going through this process for the first time. Here's our experience, FWIW: We have HHI of >200K, but applied for FA because it was a requirement to be considered for merit scholarships at the schools DD applied to. If you are putting money into 529s, then yes - they will expect you to tap those and draw them down fully if necessary before you get any FA. They also expect you to tap other savings accounts and investments (but not retirement savings). They ask about earned income, total of cash/savings/checking accounts, child support paid and received, various other kinds of income (combat pay, grants and scholarships received by the parents, WIC), payments to tax-deferred pensions and savings, deductible IRA payments, distributions from IRAs and similar accounts, number of family members, number in college, free/reduced lunch, and numerous other data points. The FAFSA does NOT ask if you have anyone in private school below the secondary level, so if you are paying $50K for private school tuition for other kids in the family, this is not taken into account for financial aid determinations. Some schools also require that you complete a FA form from the College Board; this second form does ask about private school tuition for siblings, as I recall. They came up with an estimated family contribution of over 80K for the coming year - they were definitely considering our 529s and regular savings as available to pay for college. We have two other kids in private school, and DD has gone to private HS, but fortunately she's going to UVA and we can afford to pay the in-state tuition.
I hope this information helps. |
Anonymous
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Yes, if you are low- or middle-income. The FA formulas assume that all savings in DC's name, including 529s, Coverdells and UGMA accounts, are available to pay tuition. Although not your retirement savings, as PPs have pointed out.
But if you have income over $100K your kid is unlikely to qualify for FA barring special circumstances or until additional siblings start college. Therefore, you should be saving if you suspect DC may not qualify for FA based on your household income, or if you think DC might get only a little FA that's probably going to come in the form of loans not grants anyway (unless DC gets into a school like Harvard where most aid is grant aid, but that's the exception not the rule). So if you are earning $500K, spending it all on fancy cars and a vacation house will not only fail to improve your chances for FA (because at that income level your chances are basically zip), but your lack of savings means that you will have to finance college entirely out of income, which could limit DC's college choices. |
Anonymous
| You "came into money." You have inherited wealth. How can you possibly call yourself a "prudent saver"? |
Anonymous
| Yes. |
Anonymous
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Yes, my husband + I stayed married, saved a lot, lived in a tiny place and did all other kind of scrimping because we came from poor families to be able to send our kid to a very top university. We've also always had one car. None of these things favor the middle/upper middle class family of old fashioned prudent savers.
It's the same thing for when you get old...some people cheat and transfer assets to their kids so they don't lose all of their funds to emergency health issues or whatever. States have passed laws to track some of these transfers, but the smart people tranfer funds early to avoid the law. Honesty isn't really the best policy. |
Anonymous
That was poor word choice. DH receved some stock options when his employer took the company public. So not inherited wealth, but it was a one time thing.. Thank you to those who have provided helpful info. Yes we are lucky to have enough saved to pay for college; I was just curious what happens with people who have assets tied up in things like luxury homes and cars and no college savings. Are they expected to liquidate those assets? If not it seems unfair to those of us who saved money instead . |
Anonymous
In really over-simplified terms, under the federal and other FA methods, you add up your "available" income (basically any income over some really low basic needs threshold like $30K) and your liquid assets plus college savings, but excluding retirement accounts. All of this is considered "available" to pay tuition. Then you subtract the DC's tuition for next year (you do this calculation all four years). The difference, if any, is your "need." Colleges may fill this "need" with a package of grants, loans, and work study. So yes, assuming your income isn't already too high to get FA (those of us in the $200-300K range), and there's at least some possibility you could get FA, then putting your money in stocks or CDs could hurt your chances for FA relative to putting the same money in fancy cars. For FA purposes, your bank balances and brokerage holdings that are not in a retirement account would be considered to be available for tuition and you'd be expected to liquidate them. The FA methodology doesn't ask about your housing equity or your Mercedes collection. |
Anonymous
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Sorry, but I think this discussion about what might happen down the line is seriously misguided for a couple of reasons.
First of all, no one knows what kind of financial aid will be available in the future. It used to be that people could get more outright grants and now a lot of what is offered are loans. I've been watching what young people are going through now burdened down by loan debt. Does anyone really want to take the chance that spending down their college savings on something else will just mean that there's less money for college and their kid will go into massive debt? For example, due to the sequester, some kids in DC are not getting their $10,000 Tuition Assistance Grant which goes to pay for out-of-state costs at public universities in other states. What if you had set up your budget to rely on that $10,000? Better if you can afford to pay for it yourself and if it becomes available, hey, you have an extra $10k. The second thing is why not enjoy the fact that you can pay for your kid's education and won't have to rely on financial aid? We are paying full freight and it makes me friggin' happy to be able to do that. Because my kid would be taking loans out the wazoo if we didn't have this money set aside. I've been in a situation where I was in massive debt. I hated it. It's well worth it to me to have the money in the bank to pay for her education. I don't care if there's someone out there with a big mortgage and a fancy car who's getting a better deal. This is the deal that makes me happy. |
Anonymous
| I'm not saving for DD's college. It's my assumption that the system will be completely broken by that point. I'd prefer to have my kid take out loans and then help them pay those loans off. |
Anonymous
I was just laying out the rules and facts to answer OP's question, no need to call me "misguided." In fact I agree with your humble brag about getting in a position to pay full freight. |
Anonymous
My apologies! I didn't mean to give the impression that I was selecting your post for response. I just meant that these kinds of discussions in general bother me. There will always be people who manipulate the system. Why be bitter about them? I'm glad I'm not them! And, as to the "humble brag," well, we are not in this position because we're good money managers so we can't take credit for it. This does not make us better people, just luckier. |
Anonymous
I don't understand this, unless it's a joke. If by "the system will be completely broken" you mean that tuition will continue to skyrocket, then if you save nothing, your DD will be saddled with huge loans. You'd better hope that your health and/or the economy don't get in the way of you helping her pay down her loans. Unless you're hoping for some deus ex machina solution, like college ceases to be necessary and all you need is a handful of MOOC certificates. Or you win the lottery. All these options are pretty risky.... |
Anonymous
| It is important to plan for what might happen down the road. DH and I max out our retirement (35,000) a year and save nothing, not a penny, nada, for college for our two young kids. We make 160,000 a year. If we put that money into college saving we would be locking in that money when they might not go to college, get into a service academy, or get some merit or financial aid. There is no chance of aid if we have 200,000 in a 529 while we might if we have a million in retirement savings. |