Paul Ferraresi

I find that as each new year comes, people often state, “Gee, where did the year go? It went by so quickly.” And yet, other times people bemoan that things are moving too slowly. Since we, in general, are here on this planet for 100 years and then pass away for eternity…here is a glimpse of how long eternity is….

“In the cold northern wastes there is a mountain a thousand miles long, a thousand miles high. Once each thousand years a small bird flies north. This small bird flies north to sharpen his beak on the cold hard stone of the mountain. When the mountain is thusly worn down, one second of eternity shall have passed.” –Tibetan Poem

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.

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.

I have written many times about the escalating costs of college. Starting this January, most college bound students and families complete the FAFSA form to obtain financial aid.

With 4 years at a prestigious, private school, the costs will exceed $225,000, not counting all the miscellaneous expenses, it “pays” to plan ahead. In 10 years, these 4 years of college costs will easily exceed $500,000, according to FinAid.org, a nonprofit scholarship website. A person with 3 kids can expect to shell out $800,000 to $1 million, not counting graduate school.

To assist in getting financial aid, parents may have to do financial repositioning. This includes the way business assets are titled and restructuring so they are “off” the financial radar screen. Also, consider reducing the amount of money in a child’s name. Colleges expect “junior” to use 25% of their money to pay for school. So, if the child has $10,000…he or she is expected to pay $2,500 per year.

Financial aid officers are now looking at a family’s home equity and demanding that it be used before a penny of aid is given out. So, keep that mortgage high, and place those monies into an investment that is not considered a countable asset. (Hint-hint-we have spoken about it many times here. Go to my other blog site – http://www.wealthyfutureblog.com or call us for help).

Lastly, like any investments, consider the cost-benefit analysis: Let us say your child wants to go to a university today that costs $55,000 per year ($220,000 total) and declares a Psychology major. You will end up with college debt in excess of $100,000 or more, and your child can expect to earn $30,000 per year. Many studies show people with the same degree are making the same salaries, regardless of whether they went to a state university or an Ivy League school.

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.