Paul Ferraresi

Most colleges use the FAFSA Form as the only item for assigning need-based financial aid. About 300 colleges (private schools) use a formula called the “institutional methodology” which also requires the CSS/Financial Aid Profile application. The CSS Profile asks for more detailed data about a family’s income, assets, and resources not required on the FAFSA form. This additional information includes your home equity and your retirement accounts.

(For years, in this blog we have advocated the extraction of the maximum equity from your home and withdrawal from your qualified plan. Take these funds and place them in a tax free investment vehicle that is not a countable asset for college funding, Medicare or Social Security. Contact us for more information.)

Colleges that use the FAFSA will determine financial needs based on your expected family contribution. The formula looks like this: Cost of Attendance minus Expected Family Contribution equals Financial Need.

Do not be tricked into putting a lot of assets into a child’s name. If you do, colleges will demand:
• The child use 35% of their assets for college before any aid is given to the family. If the asset is held in the parent’s name, then only 5.6% of that asset must be used before aid is given.
• If the child does not go to college, they can spend that asset as they please. Remember: You gifted the asset to them. Let’s see…would the child choose a new red sports car, or, would the child use the money for college? DUH!

Many private schools use the institutional method which counts home equity as an asset. If you have, say, $300,000 of home equity, it will be assessed at 5.6%, which means a difference of $17,000 in expected family contribution you will pay before getting any aid.

Keep in mind, many private schools cost in excess of $53,000 per year (without taking into consideration personal expenses of the child; e.g., football game tickets, new clothes, special events, etc.). Add in your retirement plan assets as being assessed in the formula, and parents will have a huge amount of Expected Family Contribution.

Public schools are making it so students have to go five or six years to complete their degree which pushes up these costs, also.

The best time to start saving for college is before the newborn leaves the hospital to go home with you.

There is no correct age to start. The earlier the better. I was blessed with parents and grandparents that instructed, motivated and guided me in money matters at an early age.

Your plan should be to help them understand money management to avoid future stress, financial burdens, emotional strain and relationship problems that the misuse of money can bring.

Teach your kids to become savers and investors. Explain your values for spending and saving money to them. You will need to teach them the difference between need and want. Alert your kids to the problems of borrowing money to consume versus borrowing to conserve. As they grow up, teach them about checking accounts, savings, credit cards and investing. My folks, from my early age of 7, taught us that we had to have some type of job, and used our money for teaching us money principles. We were taught to set up “envelopes” to save for long term, which we deposited weekly in a savings bank. Then we set up holding pots for “charitable contributions,” short term goal spending and the rest was ours to “do as we pleased.” The folks had us buy stocks “on paper” and follow it weekly. When we ran out of money, Dad would lend it to us. We would sign a note and have to pay it back with interest, from our “do as we pleased money”. I learned to negotiate interest rates with my dad based on my savings account (which he held as collateral until the loan was repaid). He was tough on me from age 9 to 12 when I borrowed any money from him.

One of my other clients taught his children about money by giving them $100 on Friday night. The goal was to get through the weekend with some money left, but, the child had to pay for all family expenses and their wants out of the $100. When the money ran out…everyone came home – no TV, no games… everyone had to sit and talk as a family until bedtime each night.

Teaching the kids to be free from the stresses of unnecessary debt and overspending is a great legacy that you can leave them. Everyday I thank my mom, dad and grandparents for the knowledge of “wealth” they gave me.

Teach them the discipline or deal with the regret later.

Although many people use 529 plans to fund children’s education programs, there are better alternatives. I am not saying the 529 plans are bad. See your advisor for alternatives. Nonetheless, if you are using these plans, here are some thoughts and ideas:

1.) The 529 plan:

Although the plan formats are fine, the overall performance has been less than stellar. Most fund companies, i.e., Vanguard, Fidelity, etc., will make a proposal to be a state’s custodian for the plan. Knowing they will be presenting to the state bureaucrats, the investment options presented by the custodians are usually the most conservative performing funds. If approved, then the bureaucrats usually choose the most conservative performing fund of the conservative performing alternatives. Consequently, the returns have been below what one could obtain in the other alternatives.

2.) Funding:

Some people have had a difficult time funding the 529 plan. Suggestions have been to use a UPromise program (www.upromise.com) or Little Grad (www.littlegrad.com). These programs allow for rebates on items purchased. Use the rebates to help fund the 529 plan. Call on family members or friends to help in the funding. Also,Freshman Fund (www. Freshmanfund.com) lets people contribute online to any 529 plan.

3.) …Here is an alternative:

If a parent has an incorporated business (part or full-time), pay a child’s wages into a Roth IRA. Those monies can be used tax-free for qualified education expenses.

Most people greatly underestimate the costs for their children attending college. Some of the major components are tuition and fees, books, supplies, lab & other charges, room and board, and the most expensive…..miscellaneous expenses. (Mom, I need money for a new dress to go to this party, or, money for tickets to the football game, and for pizza and beer…oops, I mean coke, no beer, after the game). More often than not, the miscellaneous expenses are more than tuition. In many cases, books also cost more than tuition.

Folks, don’t fool yourself, simply because the kids are staying at home instead of at a dorm, does NOT lower your expenses. Heat and air conditioning are going to explode as well as your grocery bill. At home, actual room and board expenses are usually higher than at college.

The fatal statement I hear from parents is that these college expenses can NOT keep up like this in the future. Oh No? Costs for college are tied in to what average incomes are. Back when I went to college (yes, there were colleges back then), my undergraduate costs were $3,500/year when average incomes were $5,000/year; about 70% of incomes. Today, my alma mater states that the total student costs run about $35,000/year when average household incomes are at $50,000/year. So, it is the same 70%. I choose not to discuss the costs at Harvard, Yale, MIT or Stanford, etc.!

The College Board just issued a report that “A child born in 2010 that begins kindergarten in the fall of 2015 would attend college between the years of 2028 and 2032. If that child attended an average private 4-year college and if the annual price increases for private colleges experienced over the last 30 years continued into the future, the aggregate 4-year cost of the child’s college education (including tuition, fees, room & board) will total $506,423 or nearly $127,000 per year.”

So, when do you begin to save for the kid’s college….when you hear 2 sounds…”slap” and “waaah”. Just think, for the first year of college, $127,000, 18 years from now in an 8% return investment requires a $283/mo. to be set aside immediately after hearing those two sounds. Remember, that is for year 1 only. Multiply that times 4 years and times 3 kids…and the kids say… what have you done for me lately, mom and dad”.

May I suggest you have the kids borrow from your Family Empowered Bank and not just give them the money. Make them repay the loan with interest. Since the U.S. Government recently took over control of all student loans, your child probably won’t qualify for a student loan because they do not meet the agenda (quota) of the Government. Also, too many parents think their kids will get all their money from scholarships. Fat chance! Why not interview 10 parents in your local community or church and find out how much their kids actually got in scholarships. I asked one man who said his son got a full football scholarship. So, I asked, you mean you pay for nothing for him to go to college. He confessed he pays $18,000 per year. So, it depends on what the word “is” – is!

Funny, isn’t it, once you graduate, your college calls yearly for more money from you for the annual fund raising. Hmmmm…these colleges are starting to act like the IRS – They want money every year from you.

The summertime is a wonderful time to institute an educational system for your children. I am not talking about “text book” learning, but rather, your life experiences with money.

You have a host of examples that have accumulated over your lifetime. You can begin a simple mentoring program. The pressures and hectic activities the kids go through during the school year cease in the slower summer months.

For instance, many kids (possibly even you) that were latch-key kids, learned how to develop shopping lists, budgeting, reviewing bills, cooking, clipping coupons and how to use their allowance wisely.

I am sure you have your own stories that show simple ideas that you can teach and transfer a generation’s worth of financial knowledge. Obviously, children with financial skills and a history of being able to talk about money are better able to take on life. One method of education is an allowance. Do not tie the family chores to the money. Have the kids set up 3-4 “buckets” for their money: SAVINGS (say for college); Sharing (to contribute); Spending (for new purchases) and Spending later (for a later purchase).

Another method is to talk about bad habits of yours so they can learn. When driving to the mall with their kids, you may want to say out loud in the car: “I’m usually very tempted to buy clothes that are on sale, even if I don’t need them. Then I get home and wish I hadn’t bought them. So, I’m going to leave my wallet in the car. If I really want something, I can always come out and get my wallet.” Tactics like these can help your children understand how to value a dollar.

If the children run out of allowance money or want to buy an impulse item… let them “borrow” the money from you at a reasonable interest rate, but, they must put up some of their collateral until it is paid off… say a game or their computer. They can not use the collateral until the loan is paid off.

Oh, you say, that hurts and is “tough love.” Well, it is either discipline now or regret later.