NY Times Education Life: Saving for College and A Peek Behind the Curtain of the Financial Aid Office

Here were two stories that caught me eye in the NY Times Quarterly Education Life:

"18 Years In the Making" provides tips on saving for a college education at various stages of a child's life, but first explains a tip from a financial planner:

• Financial planner Kevin McKinley suggests a "20/20/20 approach":

Take the current average cost of attending four years at a public university: roughly $60,000. Save $20,000 before your child begins college by putting aside $50 a month starting at birth and assuming a 6 percent annual return. Then, pay $20,000 out of current income while the student is in college. Finally, have your child take out $20,000 in federal student loans over four years. The $200 monthly payments afterward are not a horrible burden for people in their 20s to bear, and they’ll be debt free once the 10-year payback period is over.

• For toddlers:
  • "For most people, the best way to save for a child’s college education is still through a 529 savings plan. With 529s, you deposit after-tax money, but any earnings are free of taxes as long as you spend them on tuition, room, board and other postsecondary educational expenses."
    • Credit card rewards programs can feed into these savings:  
      • The Fidelity 529 College Rewards American Express card gives 2 percent back on all purchases as long as they are deposited into a Fidelity 529 account
      • "The Upromise college savings program offers several ways to earn cash for a 529, including 1 percent back on most purchases on its MasterCard; refunds based on what you buy at grocers that link their discount cards to Upromise; and bonuses for shopping at partner retailers online and eating in affiliated restaurants."
• Preschool years:
  • Determine if grandparents are willing (and able) to assist with cash contributions to grandchild's education
    • Kalman A. Chany, president of Campus Consultants in New York City, advises that grandparents simply give money to the parents, who can then deposit it in their own 529.
• Grades 1 to 9:
  • "One decision you’ll eventually face is whether to put some (or all) of your savings into a prepaid 529 plan. Not every state offers one, and some states’ plans are closed to new investments. The rest, however, let you essentially pay today for tuition and fees in the future."
    • I posted about the importance of understanding whether the prepaid 529 has any state guarantee behind it should the investment performance fall short of expectations. 
  • Determine if child is likely to qualify for financial aid
    • The government’s expected family contribution calculator at www.fafsa4caster.ed.gov can help on this front.
  • Determine how and when to have "the talk" about money issues and your child's college education.
• 10th and 11th grades
  • Determine whether to hire a financial adviser to assist in the financial aid process
  • The article suggests some aid planning steps that can be taken to increase your odds of securing financial aid
• Senior Year
  • File the FAFSA early
  • If grandparents are interested in contributing, probably best to have them help pay off student loans after graduation rather than make direct tuition payments to college or payments to parents.  

As the article, the best advice is to get started early:

“Parents beat themselves up about having done nothing and then continue to do nothing because they think it’s hopeless or scary,” he says. “That’s the worst thing that anyone can do. The longer they wait, the harder it’s going to get.”

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Meanwhile, "Dividing up the pot" provides an inside look at decisions made within the financial aid office at Boston University. 

What it shows, is like many schools, BU's process for packaging financial aid is not "talent-blind:"

Here were two examples cited in the article:

       

Exhibit A - 2020 SAT Scores

Ms. Wickstrom reviews the award packaged for a student with 2020 SAT scores, a family income of $22,000, $10,200 in savings and a home the family owns outright worth $225,000. “I noticed the house was bought in 1991 and I thought, ‘Wow, they were able to pay off their home with that income,’ ” she says.

B.U. is deciding not to consider home value in calculating this family’s need, because the income is so low they may not be able to get a home equity loan, especially this year. A policy in place for the past several years limits the amount of home equity counted to twice a family’s income.

B.U. calculates this student’s need at $50,800 (the federal formula puts it at $53,110 — the full cost of attendance). But this determination doesn’t mean the university will come even close to making it affordable. The award: a $17,500 institutional grant, a $5,350 Pell grant (the maximum for the 2009-10 academic year) and $3,250 in other federal grants for needy students for a total of $26,100 in grant money. The university offers the student another $11,000 in work-study and federal loans, but this leaves the family short $16,110, or 73 percent of its annual income.

“This student has a lot of financial aid — $37,000 — but they still have a big gap,” says Ms. Wickstrom, who concedes that based on what she knows, the student will probably not enroll.

        Exhibit B - 2350 SATs

B.U. seems to be making a stronger pitch to get a student with 2350 SATs whose parents are divorced. Ms. Wickstrom says the mother has income of $112,000 and reports $11,000 a year in child support. She has $63,000 of home equity and $18,400 in savings. Typically, B.U. needs detailed information about both parents’ finances to consider the aid request, but Ms. Wickstrom says B.U. received a letter “indicating that there had been some kind of abuse” and waived the requirement for the father’s financial data.

The university calculated the family’s need at $25,500 and awarded $17,000 in campus grants (family income was too high for federal grants), plus $10,500 in loans and work-study, for an award of $27,500. “We think it’s fabulous because we met their need,” she says. The numbers mean the family must pay $25,610. Whether the student accepts depends on other offers and how much the student wants to attend.

Other interesting nuggets from the article:

• Many appeals lead to changes in financial aid
  • "Last year, Ms. Wickstrom says, 600 families appealed their aid awards. “We changed awards on at least half,” she adds, noting increases ranged from $500 to $2,000."

• Expect awards to vary across schools
  • "Awards may vary a lot, even though you have provided each campus the same financial information. Private colleges typically expect families to pay far more than the expected family contribution (E.F.C., in financial aid lingo) would suggest. It’s called gapping, because there is, literally, a gap between how much a college costs and how much aid is offered."

• Stronger students can expect to receive better aid packages
  
  • "Translation: The strongest students in a pool of applicants (maybe this is your safety school) will probably get more aid than the weakest applicants (maybe this is your reach school)."
    • Bottom line, Dr. Pohl says, is that “we’re going to meet full need out of the box for our best students who have financial need.”

• Financial aid officers getting more training on understanding family financial circumstances arising from the recession:
  • “We need to be really aware that we will see parents who have lost jobs. We will see parents who have had foreclosures. We will see parents in bankruptcy. We will see parents whose equity is a negative number and are struggling to meet their monthly obligations.” That’s what Jim Briggs, a professorial-looking C.P.A. with a sense of humor (his spiral handout is titled “Fun With Taxes”) told Boston University officers at his financial aid training workshops, which he holds for about 25 colleges and universities.

• Should be aware of differences in formulas between federal and College Board methodologies:
  
  • "What’s key to know: the federal formula casts a family’s finances in the most favorable light to get the most aid, while the College Board’s methodology scrutinizes finances more critically. The federal approach, for example, does not consider the value of a family’s home or even a family-owned business with less than 100 employees. On the other hand, most private institutions consider home equity, business value and even sibling savings."

Comments

[Budgeteer]

The NYTimes article "Dividing up the Pot" contained an assertion that the packaging process is "secret." If an institution participates in federal programs, packaging algorithms cannot be secret. Student are entitled to know how the amounts of aid from all sources were arrived at. Here is the regulation:

Title 34--Education

CHAPTER VI--OFFICE OF POSTSECONDARY EDUCATION, DEPARTMENT OF EDUCATION
PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

§ 668.43 Financial assistance information.
(a)(1) Information on financial assistance
that the institution must publish
and make readily available to current
and prospective student’s under this
subpart includes, but is not limited to,
a description of all the Federal, State,
local, private and institutional student
financial assistance programs available
to students who enroll at that institution.
(2) These programs include both
need-based and non-need-based programs.
(3) The institution may describe its
own financial assistance programs by
listing them in general categories.
(b) For each program referred to in
paragraph (a) of this section, the information
provided by the institution
must describe—
(1) The procedures and forms by
which students apply for assistance;
(2) The student eligibility requirements;
(3) The criteria for selecting recipients
from the group of eligible applicants;
and
(4) The criteria for determining the
amount of a student’s award.