Article: Save for Retirement First, Then College for Kids

calmom · October 25, 2006, 11:18am

goaliedad, if you have home equity and a "cash cushion", then you are better off than someone who earns the same amount of money but does not own a home or have savings -- so it stands to reason that you can expect to pay more. If you are using a contribution to a 401K to reduce AGI, then that tax write off will be added back in for purposes of calculating financial aid, so as to give a true picture of your earnings for the year. The thresshold at which they discregard assets is set low enough so that it protects people at the lower end of the economic spectrum -- if because of other assets you are able to afford to contribute to retirement, it doesn't change the fact that you had an income of $X last year.

The tax system and the FAFSA system serve public policy goals in terms of the deductions they afford. The law allows you to write off contributions to retirement because the government wants to encourage citizens to save as much as possible for retirement, because old people without adequate savings are a burden. However, when you fill out the FAFSA you are asking for a federally-funded benefit, and so at that time the policy shifts: the government is not going to penalize you for past savings, but they want you to use current income to pay for your kid's college before asking the government to give your kid a grant, or picking up the cost of interest on his loan while he is in school, or contributing to pay his wages for a work study job. I mean, the bottom line is that when we fill out the FAFSA we are asking for a government handout. The formulas are actually very foregiving of people who have saved money -- the FAFSA won't consider your home equity, it only looks to a tiny percentage of your savings & liquid assets. But they expect you to put a big chunk of current income towards college.

It isn't easy. But the bottom line is that it is set up so that people who have less money qualify for more aid, and people who have more money qualify for less.

Both the tax system and the FAFSA would be made more "fair" by eliminating all deductions or writeoffs and exclusions. You wouldn't like it, but it would be far more "fair" to not have any loopholes at all than to let people who had enough money to afford to sock away in tax sheltered accounts get a benefit over people who can't afford to do that. I mean - if I make $50K and put $7000 into a 401K, my AGI is $43K and I pay less taxes than someone who makes $50K and is not able to contribute to retirement -- how is that fair? If we make the same money, shouldn't we both pay the same?

Similarly -- if $50K of earnings translates into $5600 of EFC, and $43K translates into $4000 of EFC - how would it be fair for one $50K wage earner to be allowed to sock away $7K, get a tax benefit, AND get an additional $1600 worth of financial aid over another wage earner with exactly the same income? Doesn't the federal government already give you enough of a subsidy for your retirement assets by sheltering them from taxes without you wanting an the additional student aid benefit?

I understand your frustrations - we are all in the same boat -- and even though my daughter qualified for generous aid this year, I worry about next year when my AGI will be somewhat higher and my son's college will no longer be included in the EFC calculations -- but the point is, the system is relatively simple: people who have less money qualify for more aid. So it seems fair enough to me.

garland · October 25, 2006, 12:11pm

I agree, Calmom, and i think you explained it well.

We are in a strange position of having income of less than half what we had in the past, yet still getting almost no aid because we saved money in the past.

But you know what? I have no problem with that. someone with our income, but no savings, needs the aid more. By next year (our last for college) our savings will be depleted, our income will be even lower, and I think we will qualify for more aid. Yay, us. We did have some retirment saving in the past, and we will in the future. (we won't be near retirement age when S graduates.) We just took a vacation from it for a while. :)

goaliedad · October 25, 2006, 12:30pm

[quote]
if you have home equity and a "cash cushion", then you are better off than someone who earns the same amount of money but does not own a home or have savings -- so it stands to reason that you can expect to pay more.

[/quote]

I can expect to pay more than the person who earned the same amount of money, has a plasma TV (all of our TVs are at least 10 years old), leases a new car every 3 years (we drive ours at least 10 years - my last car went 15). I think you get the point. I have home equity because I've not spent my wealth on stupid stuff. Yes, my daughter plays ice hockey, an expensive sport. But let me tell you, it is a developmental activity just like any other that has paid tremendous dividends in her personal (and academic) development. It allows her to attend a decent (not name brand) prep school (much better than the pathetic things that pass for public schools locally) on very generous FA although that sucked dry the "cash cushion" I had up until a few months ago. Now, I don't have any money in case, my employment is terminated, but at least that won't be taxed by FAFSA (intentionally sarchastic).

[quote]
Similarly -- if $50K of earnings translates into $5600 of EFC, and $43K translates into $4000 of EFC - how would it be fair for one $50K wage earner to be allowed to sock away $7K, get a tax benefit, AND get an additional $1600 worth of financial aid over another wage earner with exactly the same income? Doesn't the federal government already give you enough of a subsidy for your retirement assets by sheltering them from taxes without you wanting an the additional student aid benefit?

[/quote]

This is a HORRIBLE policy, that will always keep the harder working poor and middle class exactly that - working harder and poor or middle class. The problem with capitalism is that there are not enough capitalists. Those trying to bring themselves up in this world are punished (by taxes on wealth accumulation be it retirement assets or home assets) for trying to accumulate the assets that leverage that movement into higher economic status. Without the ability to accumulate assets without taxation, what you have is a prepetually needy population whose incentives are not to save and create capital (improving their own lives and the society as a whole long haul). I thought the purpose of educating our population was to improve social mobility. So why do the policies allegedly promoting this social mobility squash it by taking away the rewards of education, hard work, and thrift?

I also say if we have equal $50K incomes and I can save $7k for retirement, why are you entitled to more of my savings through government subsidy paid for through my taxes?

And deferred income (also known is IRAs, 401Ks, etc) is not a govenment tax SHELTER as you put it. That income (and any income generated off of it) will be taxed when it is withdrawn. Yes, it is moving income from a time in my life when it "could" theoretically be used for my children's education. However, it is being moved to a time when I can't earn more because of old age and as a result of having it I WON'T be eligible for SSI (old age benefits used to fund nursing care based upon income and assets - not FICA contribution). So my FAFSA punishment for funding my 401K is doubled by the fact that I can't collect government benefits when I need them most, eh?

What kind of moronic system do we have here?

The government loves to talk about how they help people based upon need, but through lack of putting their money where their mouth is (adequately funding real student FA), they have made a system where they create needy people and dependency.

And don't get me started on my Asperger's son who has marginal enough social skills to barely maintain a bagger's job at the grocery store, but not enough ability to get a real job with benefits that will fund the medication and counseling necessary to keep that job. So if I turn him loose at age 18 and he fails (because he cannot afford medication and counseling) he becomes an unproductive ward of the state. He is then disabled. However, if I continue to pay for his medical (extremely expensive with pre-existing conditions like he has) he is not disabled, but I cannot deduct those expenses when dealing with FAFSA either because then he isn't my dependent. I am faced with a terrible choice because the money that I need to help my son comes at the expense of my ability to help my daughter. And what does that teach my daughter? That the game is rigged.

jyber209 · October 25, 2006, 6:24pm

I believe they ask because IF the parents have very little in retirement funds, that might be considered in determining the "asset protection" allowance for the EFC. In other words, the "allowance" that is not subject to EFC contributions might be different for a family without substantial 401-K holdings than for someone with lots in the retirement funds. Age of the parents comes into play as well. For example, parents in their early sixties might be evaluated differently than those further from retirement.

I believe this additional consideration would be part of the more detailed evaluation at PROFILE schools and not those that use only the FAFSA.

In any event, IMO the system has plenty of quirks. For one thing, parents with kids spaced closely together come out better than those whose kids will not be in college at the same time, even if incomes and assets are comparable.

cptofthehouse · October 25, 2006, 7:09pm

Goaliedad, you did hit on a basic weakness of the aid system. Those who frittered the money away on good times, eating out, material good, vacations, splurging, will now be able to tighten their belt and use that money towards college. Those who spent it on less disposable things such as privates schools for kids (including those other than the one going to college), a house in a good neighborhood with a good school district are going to have a harder time cutting back. Those who stuck their money into assets OTHER THAN qualified retirement plans may be hit 5% of assets saved. However, those who did put the money into qualified plans will not be hit on those assets, and as Garland and her husband did, may have to take a "vacation" on pension contributions while paying for colleges. They will however have those contributions made to the pension for their old age pretty much secure from financial aid digging.

I don't think they take into consideration how much a family has put away in pension assets. If a family put their retirement money into unqualified investments, which many do, then that money is fair game for the 5% of assets rule. Someone with no pension assets gets the same as someone with a great qualified plan. Again, it is key to note that pension assets are not hit. What is done is that income is considered including any money that someone puts into a pension plan that year. Once the money is in the Plan, the following year and there after, it is considered an asset, not income. Also income from a qualifed pension plan is not considered as part of income for financial aid purposes. It's just that the contribution which is deductable on ones tax return is not deductable from ones assets to be considered that year.
So if you and the Smiths make $50k in a considered year, both of you are considered on the same basis for income REGARDLESS of whether you put $7k of it in a pension plan. Why should the college let you put $7k in a pension plan and reduce your income that year by that amount while Smith who is not putting the money in a pension plan is hit up for the full $50K. Now the following year, you'll be $7K plus interest earned on the money ahead in pension money over Smith who would not have that amount in a plan, and if you two earn the same amount and have equal assets except for that $7K+, you will be hit up for the same amount of college funds. (this is greatly simplified, of course). And you will be ahead of Smith because you have sheltered that money and have it for retirement. If Smith put the $7k into investments outside of pensions, he would have been hit with about 5% on the asset plus earnings the following year, and in addition to that, he would have to include the interest/dividends/realized gains as part of his income which gets a bigger whammy that the 5% on assets. College parents who are looking at some financial aid would be wise to save in some sort of a qualified plan, as it is a pretty tough hit on non pension savings.

calmom · October 26, 2006, 12:27am

Goaliedad, the FAFSA system is not expecting you to contribute 1 cent out of your home equity or your retirement assets. All they are doing is asking for your TRUE current income, not the fictional income that is created if you make a retirement contribution and subtract it out of income. Your whole long rant seems to be based on a gross misunderstanding of the system or a falsehood. You could be living in a million dollar home and if your income for the year is $55K, your financial aid will be based on that $55K and whatever liquid assets you have -- NOT an IRA, NOT a 401K, NOT home equity.

They also only look to a very small percentage of assets -- a family that earns $90K/year and has $50K in savings is going to have much higher EFC than a family that earns $50K and has $90K in savings. There is an income protection allowance and beyond that level approx 40-45% of every earned dollar goes to the EFC. There is also an asset protection allowance, and beyond only about 5% of assets goes to EFC. -- you can probably earn about that much in interest on a CD or money market account. So everything favors the family with savings, or the family that has a past history of making more money (and therefore more savings) as opposed to the family that has always has a marginal income and thus no opportunity to save.

No one with range of income that would qualify to have all assets excluded from consideration - the simplified needs test - is buying plasma tv's or leasing new cars except in your imagination. The federal student aid system is NOT set up to promote capitalism among the middle class -- it is there to help NEEDY students. "Capitalism" is something that should take place without the need for government subsidies -- if you want the government to give everybody more money to to pay for their kids to go to college, the word you are looking for is "socialism". "Capitalism" is all about getting the money to buy what you want on your own, without government handouts.

It seems to me from your post that you have been doing pretty well. You made the choice to send your daughter to a private prep school (which "sucked dry" your savings) and to participate in an expensive sport. My kids went to public school because that is all I could afford. I don't see how or why the government should give you more money because you opted to spend what you had on a luxury item -- it is a "luxury" in my eyes because the government provides free public education for all, so therefore a private school is a discretionary expenditure no different than a plasma tv or a new car.

You've listed some unusual hardships -- but the FAFSA system provides room for those to be considered. If you tell the colleges that you have lost your job and about the medical expenses for your son, then those factors can be used by the college under the "professional judgment" regulations to make adjustments to the data on the FAFSA. My daughter's college made those sorts of adjustments without my even asking, and reduced our EFC from about $5600 to around $2800, which made my daughter eligible for a Pell Grant and an Academic Competitiveness Grant.

So basically the system has room to consider true hardship.

goaliedad · October 26, 2006, 9:53am

Calmom,

I strongly disagree with your analysis of the economic ramifications of the taxing of retirement savings.

When you in effect tax (by including in FAFSA available income) reasonable (10% of income) contributions to a retirement account and not tax the moneys already accumulated in those accounts, what you are saying to the people is that the government is here to protect the assets of those who started out with more and to attack the ability of those who seek to obtain more retirement assets. That isn't Socialism or Capitalism. That is Robber Baronism that seeks to protect the wealthy at the expense of the rising middle class.

Of course, being the cynic that I am, I fully understand that politics is about those who have money using that money to gain power, so that it will protect and grow that money in a positive feedback loop. The government of the wealthy isn't here to help those who aren't wealthy to build wealth. No, that is feeding the competition.

It portends to help those who don't have, but by putting in disincentives like the FAFSA tax of deferred compensation, it discourages people from saving for retirement. Yeah, if I had put my money in my 401k instead of buying a home when I was younger (so my children wouldn't attend inner city schools like I did), I wouldn't need to be putting 10% of my income into my 401k now.

And please don't get me started ranting about my school choice being a luxury item. When your local school district spends less than $6000 per year per student, what kind of education do you think you can get? When they spend more money on litigation of special education than special education itself, what kind of chance do special needs kids get? (Hint, only the lawyers win here) When the school district can spend a very generous 6 figure sum on a consultant attorney whose job is to advise the district on how NOT to spend money on special education, where do you think their priorities are?

Even my normal hockey-playing daughter got the short shrift because the district loads up 35 kids in classrooms 5 of whom get all the attention (of a teacher who is not trained in special ed) because they don't have extra resources assigned to these kids. Kids who aren't a problem and pass the state tests (the joys of teaching to a test for NCLB) get zero help. This is almost as bad as the inner-city LA education I received right after Prop 13. Yes, I grew up with nothing.

And I was lucky enough (someone did me a HUGE favor with admissions) to get into Berkeley. My parents saved money (for their retirement - so my mother who is now in an assisted care facility is NOT a ward of the state) and were ineligible for me to get FA, so I worked 60-70 hours per week unloading trucks during summers to pay for my education.

Trust me, I've seen enough of how government punishes people who take initiative to do better by subsidizing those who choose not to.

One of the main reasons college eduation is so expensive is that people are willing and able to go into debt to finance it. It is the same reason why housing is so outlandishly expensive in places like California.

When government subsidizes something (through tax incentives), they always get more of it. So when you can deduct your interest payments and get 1/3 (or more) of it back from Uncle Sam, you get more bang for the buck spending your money on more housing than on other things. When interest rates fall, people discover that for the same monthly payment, they could either buy a more expensive home or re-finance, lower their monthly payment, but give 1/3 (or more) of that savings to Uncle Sam in higher taxes.

The choice for many was very obvious. But with a limited supply of homes on the market at any given time, all this extra buying power from dropping interest rates resulted in home prices getting bid up higher than ever, hence the re-inflating California real estate bubble.

When the government made more and more subsidized and tax deductible loans available for college education, people realized they could afford to spend more on college education than they could before. And like with home supply, there is a limited supply of high quality (needing the loans as opposed to community college and lower state U's) school slots available at any time, this expansion of moneys available through government subsidized loans allowed the better colleges to raise tuition.

This is all pretty simple economics that for some reason people choose to ignore.

So what our wonderful government has done for us is made us ever more dependent on them for aid (now in the form of ugly debt) than we use to be. Todays kids can't put themselves through Berkeley by working summers like I did. We now have to game a FAFSA system to keep us from being ever indebted for our children's education.

As much as the people at FAFSA try to create equity, they fully admit that no matter which option they choose, inequities always result. Read that article referenced in post #13. As much as they look at government grants and loans as a handout to those who cannot afford it, what they've done is made it more more difficult for those of us who aren't quite poor enough to get that generous aid through their subsidies on loans.

Yeah, I complain about what their inequities are doing to my ability to NOT become a ward of the state when I'm old. Yeah, because you don't earn much, you children can gain some benefit from playing the system. But my point here is that the government has created a system that you have to play and is not as smart economically as they would like to think and definitely not kind to us who struggle to build the wealth (i.e. save money) so that we can change our lives.

mercymom · October 26, 2006, 10:29am

"One of the main reasons college education is so expensive is that people are willing and able to go into debt to finance it."

So very true. It is just amazing to me that there are so many people who are willing to not just "take a vacation" from paying into a retirement plan but also to borrow thousands upon thousands of dollars, in some cases unnecessarily, to put their kids through college. I agree with goaliedad that, at least for the elite schools, this has got to be a factor in the high costs of college education today.

I know two families who are making what I consider huge financial sacrifices to send their sons to really big name school. In one family's case it is a sacrifice they are not willing to make for their daughters who are all at the state univ. while brother gets the fancy degree. Admittedly the Ds probably couldn't get in their brother's school, but really what does this do for family unity? In the other family, they have chosen to go to a private bank and borrow their EFC to the tune of $30k/yr because, in spite of them both working, they can't actually afford to pay $30k/yr no matter what the FAFSA says. This is borrowing on top of S's student loans, work study and grant from the univ. These parents will be in debt for $120,000 when S graduates, instead of having anything at all saved for their retirement during those four years.

As long as the school can fill the freshman class with people who either really can afford to pay, have an EFC the size of calmom's or are willing to take on huge amounts of debt, (and who are of course academically qualified) there is no incentive to make the education costs reasonable for the rest of us.

garland · October 26, 2006, 10:39am

Calmom--I agree with you overall examination of the system. I do have a question about something you said which I find puzzling, that Barnard altered your D's EFC so she was Pell-eligible.

I work at a college of mostly very low-income students. Part of my job is to help with their FA applications. According to my understanding, Pell eligibility is a formula-based system triggered by FAFSA EFC solely; it's not something that a school has any discretion on. I'm wondering how Barnard was able to change your D's FAFSA EFC in order to make her Pell-eligible. i have students with really low incomes who are not, since the rules are so strict.

mercymom · October 26, 2006, 2:02pm

Getting back to the original point of the thread, if you use the example of $50k income with $7k investment in 401k plan (or other qualified retirement account), cptofthehouse seemed to think that goaliedad would continue to put the $7k into the 401k anyway and would still be ahead of the guy who didn't fund retirement, even if FAFSA added the $7k back in to determine EFC. I think goaliedad's point was that he wouldn't be able to afford to put the $7k into the 401k; he'd need it to pay his EFC, so for four years (or more) there would be no contributions to retirement. In this situation the OP's article would advise to find a cheaper college and keep paying into the 401k, ie, pay your retirement first.

I also think goaliedad is contemplating a spendthrift neighbor who doesn't just have to cut back on his "stuff" to pay tuition, but who maybe has been financing the lifestyle on credit and therefore has no net worth and gets a low EFC thereby allowing the guy with the boat and the fancy car to get FA that frugal goalie can't qualify for (trust me goalie I feel your pain).

So actually both calmom and goaliedad are right, each in their own way.

calmom · October 26, 2006, 4:21pm

Garland,
FAFSA regulations allow a college financial aid office to alter data based on the exercise of "professional judgment". See:
<a href="http://www.finaid.org/educators/pj/%5B/url%5D">http://www.finaid.org/educators/pj/</a>

They can add or subtract from income or to the adjustments to income, based on unusual or extraordinary circumstances. For examples, see:
<a href="http://www.finaid.org/educators/pj/casestudies.phtml%5B/url%5D">http://www.finaid.org/educators/pj/casestudies.phtml</a>

In my case, they used data pulled from the itemized deductions on my tax return to make an adjustment that reduced my income. This, combined with the fact that my 23 year old son returned to college, had the effect of reducing my EFC to below-Pell range. Although my son is supporting himself and attending an in-state public, FAFSA regulations REQUIRE that he be treated as a dependent student due to age -- so he actually has a very high EFC and is not eligible for any financial aid, since his own full-time earnings and savings act to increase his EFC.

I'd note that although Barnard used the data to qualify for us for more federal aid, they did not cut my daughter's institutional methodology contribution in half because of the grant eligibility. Rather, they asked for his college to provide cost of attendance data, and they subtracted out his tuition and fees, but not living expenses. Since his tuition isn't that much, we still need to pay significantly more than the federal EFC -- but basically we ended up with about $3500 more in grant money than we would have had on the numbers that we started with.

Here is what I learned from this, for students who are applying this year: (1) get your financial data including tax returns done as early as possible, and send copies of the tax returns to the college financial aid offices whether they have asked for them or not (if they are willing to accept them); (2) Go over the list of examples of special circumstances (at the links I provided above), and if anything you have fits, be sure to include that in a letter that you send to the financial aid offices, along with supporting documentation. For example, "medical or dental expenses not covered by insurance".

The reason I say to do this early is that it will allow for a better comparison of financial aid offers. Barnard asks for all tax returns very early; Chicago is willing to wait until April -- so what happened is that I have an award from Barnard based on professional judgment criteria that Chicago could not have been aware of, because they didn't see my tax return and I didn't know that the info was relevant. Whether they would have dealt with those numbers the same way, I don't know -- the essence of "professional judgment" is that it is discretionary -- but I do know that we received 2 financial aid awards based on different underlying criteria, with the Chicago award being weaker. (Of course, if my d. had wanted to go to Chicago over Barnard, then we would certainly have appealed the Chicago award with the additional info).

A second reason to do this early is because the financial aid awards can change - and this can work either way -- data on the tax return may also result in upward adjustments of income as well as downward. The college will see those tax returns eventually. So if you defer sending the final returns, you can make a decision on colleges based on an award that is reduced later on.

Most likely the low income students do not have tax returns that provide the sort of data that would give you reason to make extra adjustments to income, which is why you may not have encountered this. Low income people generally do not have a Schedule A that itemizes medical expenses, large amounts of state taxes paid,or casualty loss -- and it may be that for FAFSA purposes, the data needs to come from the verifiable source of the tax return. This is one of several ways that the system actually favors middle class applicants over lower class.

In any case, my daughter's Pell Grant eligibility is largely an artifact of the 2-in-college circumstance, which will evaporate next year when my son is 24 and no longer considered to be dependent.

garland · October 26, 2006, 4:37pm

that makes sense, Calmom. I have seen FA people here use professional judgment to override dependency decisions, but not to adjust EFC inputs. I wonder if that is something that the "better" colleges are better at effecting.

calmom · October 26, 2006, 5:02pm

Goaliedad, all I can see is that you are ranting about how much richer you are than me. I spent all of the 90s struggling to get out of debt and make ends meet while tried to juggle parenting with earning enough to support 2 kids on my own -- I never had a dime to contribute to retirement after the birth of my oldest kid. So #1: Truly needy families do not have extra money to put into retirement accounts, they need every single penny they earn just to make ends meet.

I also have the distinction of having sent my kids to elementary & middle school in one of the state's lowest spending districts -- the annual spending when my kids were there was under $4000.... so no, I am not going to shed tears for you having to flee a district where the spending was $6K annually. In California, $6K is what the richest districts spend. (See chart of per-pupil spending at <a href="http://www.plsinfo.org/healthysmc/201/children_edu.html%5B/url%5D">http://www.plsinfo.org/healthysmc/201/children_edu.html</a> --)

Basically your complaint is that you have been enjoying the benefits of more affluent lifestyle (private school + retirement savings), and that the government-subsidized system to help poor and struggling families won't make allowances for your spending.

If you had facts that showed that you somehow NEEDED more money than I do, I could buy into your argument -- but complaining about your retirement savings and the cost of private schooling in a country where the vast majority of families have virtually nothing put away for retirement and send their kids to public schools isn't going to do make it. That's just more evidence that you have less of a need, since you had discretionary dollars that I didn't.

goaliedad · October 26, 2006, 10:19pm

Calmom,

I'm sorry you feel that this has turned into a flame war, but please do not try to use 10-year-old spending figures (the link you put in your post referred to 1994-1995 and 1995-1996 expenditures) to compare to today's educational cost. I found a local newspaper article to you

<a href="http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/06/01/MNGSSJ5M901.DTL&hw=school+district&sn=001&sc=1000%5B/url%5D">http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/06/01/MNGSSJ5M901.DTL&hw=school+district&sn=001&sc=1000</a>

you might use for comparison of today's figures. Foster City in your link was spending $4362 per student in 95-96 and in 2004 was at $7089 with other local districts in San Mateo County similarly increasing their spending. I'm pretty sure your school district is outspending mine today.

As for affording a private school education for my daughter, my share of this year's tuition has wiped out my security money (in case of layoff or illness). The next 3 years will be financed through home equity loans. Yes, I am fortunate enough to have home equity, but much of that came through making extra principal payments years ago (instead of funding my 401k). She has earned the scholarship moneys we are receiving through her hard work and dedication in her studies and on the ice. It is an incredible improvement in her classroom experience (not to mention the personal growth) that is well worth the price I am paying for it.

I never said that I NEEDED the money more than you do and I don't challenge your need. My beef is that there isn't adequate FA for the middle class who struggle to save for their retirement and those who put money away for their retirement are punished for doing so. I'm not asking for a free ride. I'm asking that my thrift in saving for my retirement (as compared with people with similar incomes who don't set aside money for retirement) not be punished. And I need to save because even though I've been in defined benefit pension plans for well over 20 years, due to layoffs and employer forced pension plan changes, I have the equivalent of $200 per month in vested retirement benefits at present to go with the Social Security check that the Easter Bunny will deliver at age 67. So saving for my old age has kinda become important to me. I'm sure your retirement financal position doesn't look too good right now either.

I'm sorry if you took my posts the wrong way, and I'm glad that you are getting good FA for your child at Barnard. You've had a tough go of it and I wish you and your daughter well.

cptofthehouse · October 26, 2006, 11:13pm

It is very difficult to pay for private education and save for retirement. I certainly will agree with that statement. And state uni tuitions are getting up there very quickly. It is not an easy financial road for those parents trying to give their kids the best education available to them.

I still don't see how you feel penalized for putting aside retirement mone, Goaliedad. If it is put in a qualified plan, the earnings and gains are not considered by FAFSA and most private colleges. Nor is the accumulated amount counted in assets. It's just that you do not get to exempt the contribution you make in a given year, though Uncle Sam may allow you to exclude that income for tax purposes. You just aren't give a pass on the contribution; you are NOT penalized for it. Where you get killed is if you dare to save money in a non qualified pension plan or in any plain old savings vehicle.

Despite the upward spiraling of private college costs, the top schools are getting more and more competitive. The cost is not handicapping the appliant pool for the most selective schools. I think, though, that some of the schools that are charging ivy style tuition without the rep are beginning to find themselves competing with state schools and schools offering merit awards and/or colleges with low sticker prices.

Most of us are in the same boat regarding college vs retirement. Like Garland, many parents we know, take a break from retirement savings while their kids are in college. It is a choice they make, because they feel it is a worthwhile one. I tend to agree with those parents, though these days, I am looking longer and harder at the high cost colleges to see if the school is truly worth the extra expense. There was a time that I would have said that my kids could go whereever they wanted to go, if there were any way we could scrape up the money. Now I am not so generous. With some unexpected expenses with the two who have finished highschool and gone on, and getting older with uncertainties looming in the financial horizon, we are going to have to be more cost conscious than I wanted to be. And it is pretty clear that we are not going to be well to do when we retire; we are hoping that our standard of living does not plumment too low.

goaliedad · October 26, 2006, 11:41pm

[quote]
It's just that you do not get to exempt the contribution you make in a given year, though Uncle Sam may allow you to exclude that income for tax purposes. You just aren't give a pass on the contribution; you are NOT penalized for it.

[/quote]

A lot of people do not have a defined benefit retirement plan or cash balance pension through their employer, but are given only 401k plans with company match as their only retirement plan. Currently the trend is going that way. Their contribution to that plan is added back into their AGI for FAFSA purposes. So these people are treated differently than people who are 20+ years vested in a generous defined benefit retirement plan and don't have to put away as much in a 401k to have a comfortable retirement.

I have had the misfortune of having a pension trimmed and been laid off from another just prior to vesting. I still have a couple of years to go before vesting in my current employer's plan, but this employer has had a history of unexpected layoffs, so I can't really bet the farm on this pension growing big either. So I think of my situation as one where I must save for my own retirement. And taking 4 years off for my daughter's college is no way to get that account built up.

calmom · October 27, 2006, 2:18am

Garland, the Barnard financial aid department does have an incentive for qualifying my d. for a Pell grant if they can, for 2 reasons: (1) Because of their financial aid policies, they are going to give my d. the same grant money whether or not she qualifies for Pell -- so basically qualifying her for Pell and the ACG allows them to reduce their institutional grant by that amount. I know this is true because I questioned the Pell grant when it was listed on our initial financial aid award. They told me that we would get the same total grant indicated whether or not she qualified for Pell. (The contingency at the time was whether or not my son returned to college -- as if he were not in college, then we would not qualify).

(2) Obviously, it is better for Barnard's "stats" about financial aid to be able to list more Pell grant recipients. So if they have a student who is borderline for Pell, then I do think there is a strong incentive for them to go over the financials very carefully to see whether they can get the EFC down.

The professional judgment can work both ways, though. The college my son attended didn't like the way I valued my "business" (I am self-employed but work as a freelancer, so when asked to value the business I just list my current receivables, which is never very much). That college insisted on valuing the business as whatever the previous year's income was -- so if I made $40K, they went in and amended the FASFA to say I owned a business worth $40K. Needless to say, that did not make me happy, though overall the school was generous with financial aid.

calmom · October 27, 2006, 4:24am

Goaliedad, just to clarify the point -- I gave you figures about the school expenditures from a time when my kids were actually in that district; the current per-pupil figures for the district are a whopping $6,247 annually, so today's figures really don't change the point. (Foster City is several steps up the ladder in terms of its district resources). The point is that I lived in what was termed a "low wealth" district and I sent my kids to public schools. Private schools were simply a luxury I could not afford.

I'm sorry that you are having a tough time financially. Sending a kid to a private school, whether for high school or college, is a choice. I am not sure whether your reference to a home equity loan for private school is for high school or college, but if it is for high school -- then you are making a choice that I would never have made. I'm not saying that it is right or wrong - just that it is a choice, and I would not have gone into debt for my kid's K-12 education when they are entitled by law to a free public education. I spent the time that my son was in high school trying to get out of debt so I would be in a stronger financial position by the time he started college.

At the college level, I am willing to go into debt if needed, but not excessive debt. I define excessive to mean I will not take on more in monthly loan payments than I can comfortably afford. I also expect my kids to take on the maximum available Stafford loans to help fund their own education.

I am glad that my daughter was accepted at an excellent private college with generous need-based aid policies. But I told both my kids that they had to apply to in-state publics, and that private colleges were contingent on getting adequate financial aid. Each of my kids had to turn down their first choice colleges because of inadequate financial aid awards. So I know it can be tough.

However, my son is now attending an in-state public, a CSU, and paying his own way. (He started out at an expensive private but dropped out after 2 years, and is only now resuming his education). The public college is affordable and while it doesn't offer the same level of resources as the private college... it is an acceptable alternative for a middle class kid. If Barnard hadn't come through with sufficient money for my daughter, then she had 3 UC campuses to choose from and that is where she would be. I don't think that the middle class are being penalized because most have to make do with public colleges; on the contrary I think we live in a country that offers tremendous opportunity because there are so many publicly funded institutions of higher learning.

In other words, I am glad that my daughter managed to get into a school of Barnard's caliber, and I am also glad that we have received adequate need based financial aid... but I did not ever think of that as an entitlement. I am sorry that my son had to compromise on his college choice because of financial limitations, but I am not angry about it -- it's just the way things are. I would have been disappointed if my daughter had been forced to turn down the prestigious colleges which admitted her because of lack of money, but I would not have been angry. I was fully prepared for that possiblity because of the unknowns I face with financial aid given my California home equity and uncertainty about what private colleges will do when looking at my ex husbands financials.

I do think that the financial aid system should be set up in a way that gives more money to poor students, and I think rather than increased financial aid to the middle class, colleges might be made more affordable through expanding available tax deductions & credits for college tuition. Those of us who make enough money to itemize our deductions and to be concerned about issues like reducing our AGI's through retirement contributions will also benefit from those deductions, but the current limit of $4000 is too low, given that the national average tuition for public universities is around $5800. To me, it simply makes more sense to give an expanded tax writeoff to the families who do not qualify for substantial need based aid, because those families are also in higher tax brackets and so would have a direct benefit.

The one reform I would like to see made in the FAFSA calculation is the determination of dependency; I think it is unfair to poorer families and to young adults who have been working full time for individuals age 23 and under to be treated as dependents even if they are living independently and self-supporting. It certainly is not fair to my son after 3 years working and living on his own to have my income and assets included in his EFC, nor to have his own earnings and assets assessed as if he were dependent -- when he also has 2 years of tax returns and voter registration records to document that he has been independent and self-supporting, and living apart from his parents during these years. If my son had been treated as independent last year he would have had an EFC of $5500; since total cost of attendance for his in-state college is $14,000, he would have qualified for work study and loans. However, with my income and assets considered, his EFC was around $17K -- only $5600 of that was due to my financials, the remainder was because as a "dependent" he was expected to contribute 35% of assets and 50% of earnings. If most of earnings are going to current living expenses, that puts the expected EFC beyond the amount of accumulated savings.

I think that punishes young people for working. Also, I know many kids from lower middle class families whose parents can't or won't contribute to their support or education after they are 18 and graduate from high school - it is common for these kids to attend community college and then transfer to the university later, or to defer college for a year or so while they first work to save money. But the financial aid system essentially punishes them for electing that route, because the more they earn and save, the worse things get for them until they reach age 24.

Anyway, I am far more concerned about young people like my son than I am about my own retirement or financial situation. (By "like my son" I really mean others in his position -- I would actually have advised my son to avoid taking loans this year even if he did qualify, given what I know of his finances and current earning ability). In 4 years my daughter will be out of college, I won't have to worry about supporting any kids, and I will be able to start to put away more for retirement. Obviously the less debt I have the better, so I'd much rather prioritize paying for college than putting money into retirement in any case. I don't care what the experts in the Houston Chronicle article say: I think it would be stupid for me to put money into a retirement account and then borrow the same amount of money to pay for current expenses -- the one element of my retirement planning that is firmly in place is that by the time I am 66 years old, I will be entirely debt free, with all college loans AND my home mortgage fully paid off.

goaliedad · October 27, 2006, 9:41am

[quote]
The one reform I would like to see made in the FAFSA calculation is the determination of dependency; I think it is unfair to poorer families and to young adults who have been working full time for individuals age 23 and under to be treated as dependents even if they are living independently and self-supporting. It certainly is not fair to my son after 3 years working and living on his own to have my income and assets included in his EFC, nor to have his own earnings and assets assessed as if he were dependent -- when he also has 2 years of tax returns and voter registration records to document that he has been independent and self-supporting, and living apart from his parents during these years. If my son had been treated as independent last year he would have had an EFC of $5500; since total cost of attendance for his in-state college is $14,000, he would have qualified for work study and loans. However, with my income and assets considered, his EFC was around $17K -- only $5600 of that was due to my financials, the remainder was because as a "dependent" he was expected to contribute 35% of assets and 50% of earnings. If most of earnings are going to current living expenses, that puts the expected EFC beyond the amount of accumulated savings.

[/quote]

I agree with you that the "tax" on dependent student earnings and savings is way to high. When you add 50% to FICA of 7.65% and Fed Income Tax of 10% you get more than 2/3 of moneys earned (above the personal exemption) taxed away (not even figuring in any state taxation). So in a $6 per hour job, $4 of it goes to taxes or the student's college costs. I can't see too many students wanting to work harder than required (there is an expetency for work/study in most aid grants) for a whopping $2 an hour. And heavens forbid any of that money sees a bank account!

I kinda know why they treat all kids under 24 as dependents now. I remember a particular student I knew at Berkeley back in the early '80s from a VERY wealthy family (he had stereo equipment that was worth more than a good used car), whose father figured out that if he got his son an apartment and a makework job and had the kid file 1 tax return independent, the kid was eligible for grants to cover tuition and interest free loans to cover living expenses. The kid was taking the max loans, investing the money and had from what I was told, had more than tripled the government's money by the time he graduated. Bought himself a very nice luxury car as a graduation present with that money. Talk about milking the system.

Unfortunately, the results of that type of activity is what we have today.

Oh, and yes, I will be going into debt for my 9th grade daughter's private education. And it is worth every penny.

Lets say the local school (allegedly the best in one of the largest counties in the state) can barely prepare 10% of its graduates to be eligible for colleges like the UC system. And these kids basically prepare themselves by their parents paying for extra tutoring. Anyone with money in the county sends their kids to the local private schools that don't give FA - they want to keep us riff-raff out. This is very typical in the south.

The feeding middle school where my daughter went last year was a joke. My daughter regularly slept in class (it is easy when there are 34 or more kids in a class) and was an A student (this despite the fact that she is of rather average intellegence). Teachers and administration were not interested in challenging the kids at all. They passed out worksheets and lectured. If she saw 2 hours of homework a month it was because there was a project.

Contrast that with this year at a boarding school in NH. She is in honors classes of 9-12 students where the students are expected to read the material at night and discuss the material (group discussion) in class. They have nightly 2 hour study blocks which are not adequate for her to keep up with the work. She typically puts in about 10-12 hours of study on weekends. She plays sports 2 hours a day 6 days a week and has 1/2 day community service time on every other Saturday (the other Saturdays are in class).

She is working harder, learning a lot more, and enjoying life more than ever. Her self confidence is skyrocketing with her academic achievement. And her grades are terrific. Worth every bit of debt I take on. It will prepare her for a college like you daughter attends, unlike her public high school. The "free public education" she is entitled to her is worth every penny I have to pay for it. Although I do miss her.

calmom · October 27, 2006, 10:42am

I understand the potential for abuse with wealthy students claiming to be financially independent -- but I just think that they should look at the real facts, including tax records. In my son's case, he has 3 years of full time employment, including 2 full years in which he was not claimed as a dependent; he even had a 401K at his job. It was certainly not a make-work job - he had to travel a lot and was promoted to a supervisory position. They could avoid fraud by also asking to see the parents tax returns -- I mean, it's one thing when a wealthy parent has an "independent" kid with a minimum wage job -- but in my case they would see a kid earning $25K and a parent earning about $45K. The vast majority of 18-23 year olds who are out of school and working full time come from families of moderate means -- I think we tend to raise our kids with the expectation that they will work simply because we know that we may not be able to contribute much after they reach adulthood. In any case, there is always going to be a certain amount of fraud: there are wealthy people who have money hidden away in offshore accounts and who "retire" the year before their kids start college so they look poor on paper -- but that is a tiny fraction of the aid applicants.

I actually feel that the rules about financial aid and independence are there to serve a different social agenda: to ensure a steady stream of entrants into our so-called "volunteer" armed services. The reality is that the military is the only path for many students to get the funds for a college education, so basically they shut the door on financial aid for the same demographic who are also the most likely to enlist.

I'm glad your daughter is doing well in her boarding school; maybe her achievements there will put her in a better position to win a good merit scholarship or perhaps even an athletic scholarship. I do feel that my daughter was under-challenged in high school, and she is finding college to be very challenging, because she never really had to work for an A in high school. But I just chose to do what I could afford, which was to pay for outside enrichment activities rather than a different school environment. Again, it's not a judgment -- I just can remember being in an utter panic in the mid-90s about the amount of debt I faced. After I split up with my ex, I put all my credit cards away and we lived completely on a cash basis, because I had done the math and I coudn't see any way out. The thing that helped me was falling interest rates in the late 90's coupled with the rise in California real estate prices -- I was carrying so much debt that I couldn't qualify for a refi of my house at first, but when the interest rates came down and the appraised value of the house went up, eventually I was able to get a home equity loan and use that to pay off all the consumer debt. Then rates kept falling so my adjustable mortgage and home equity loan payments were going down, just as my son started college, and I took out a PLUS loan for him - but my overall monthly payments were even less than they had been before, so I was o.k. When rates started to climb again, I refinanced and got a fixed rate... so I've done pretty well with debt management. But that's why I am very reluctant to borrow unnecessarily at this point. I figure that debt would be a far bigger barrier to retirement than lack of retirement funds.

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