NYT: Today's Lesson: Rethink College Funds

<p>Now that is a very interesting question. You might be able to buy a "future" in a Maryland education. My hunch is that to start one you have to be a MD resident. But imagine if these were in fact fungible and tradeable -- not just transferable. But it's also possible that there are better ways to invest your money over the long-run, and thus there may well not be a good market for such tradeable tuition guarantees. On the other hand, one of their chief advantages is that they are inflation-indexed to the cost of public college tuition in the particular state. So if there were a market for these things, somebody would also figure out how to hedge and arbitrage these things taking into account the relative growth in tuition in different states.</p>

<p>I looked at tuition as like purchasing a piece of property(home). Different price ranges, different locales, investment in that price could increase or decrease, there is a cost of maintenace, insurance, utilities, and a huge array of financing options from different sellers. </p>

<p>If you can buy, sell, and hedge mortgages and student loans why couldn't you do futures on tuition? Perhaps people are already doing a form of futures by selecting mates, preschool, private schools or neighborhood selection for public HS. </p>

<p>garland, kity, can you see that there are ways to "protect" kid's (UGMA) assets while still being within the intent and moral guidelines for using UGMA funds?</p>

<p>itstoo, I also looked at tuition like purchasing a home in a different sense. If you are willing to borrow on a long-term mortgage in order to have your home now, you should be willing to borrow to invest in an education whose payoff will come in the form of future earnings. Fortunately, we didn't have to borrow, however, nor tap our home equity to cover the kids' college costs.</p>

<p>Itstoomuch, I am sure there are ways to "protect" UGMA's. I feel that legal is not the same thing as ethical. I am not so much interested in the intent of UGMA guidelines, as I am in the intent of Financial Aid. If the kid has the money, then why should someone else (you, me, etc) be paying for that kid's education? FA should be for those who don't have the money; those that do should count their lucky stars. I know I do.</p>

<p>Garland notes,"I feel that legal is not the same thing as ethical. "</p>

<p>Response: Frankly, I find what is ethical tends to be determined on whose ox is gored. Is it ethical to penalize parents who scrimp and save, and who cut back their lifestyle for years in order to put away some money for their kid's education? Is it ethical to subsidize spendthrift parents who do nothing and plan for nothing with subsidized loans and grants? Is it ethical to give large merit pay awards to kids based solely on their SATS, yet give nothing to those kids who actually perform outstandingly well in college but had lower SATs? </p>

<p>I guess it all depends on your perspective.</p>

<p>how do you define Financial Aid, besides tums, rolaids. and peptobismol?</p>

<p>Do you say that FA are just grants, scholarships, Perkins, Ford, Hope credits. public service, ROTC? Or do you include other forms of aid as staffords, PLUS, supplemental student & other loans? For the most part are they, ALL, subsidized or guaranteed by US government and by implication by the taxpayer of future generations, whether they have future kids? </p>

<p>Let's look at the house example: Do you pay cash or do you finance and let inflation take care of the future payments (assuming fixed interest)? This is why mack's comment is so interesting.</p>

<p>Hmm, if your home mortgage interest is tax deductible, is that, therefore, financed by the gov't and us?</p>

<p>I totally agree with Mack. If someone doesn't want to use their money, and would rather borrow, fine. subsidized loans are meant for lower income families. Many in the middle class use home equity. AS far as guaranteed loans, like PLUS, I think those are generally available and are non-needbased --so I dont believe you would need to hide UGMA money to qualify for them.</p>

<p>*"Is it ethical to penalize parents who scrimp and save, and who cut back their lifestyle for years in order to put away some money for their kid's education?" *</p>

<p>I guess I don't know what you mean by "penalize." How are you being "punished" if you save for your kids' education and then are able to pay it? It makes no sense to say you are being "penalized" because someone else gets aid. Other People's Money - whether the taxpayers' money or wealthy alum's money - was never yours to begin with and you cannot be "penalized" by it not being given to you.</p>

<p>
[quote]
"Is it ethical to penalize parents who scrimp and save, and who cut back their lifestyle for years in order to put away some money for their kid's education?"

[/quote]
I believe your question was answered by the second part of taxguy's rhetorical question, below. See: the fable about the industrious ant and the frivolous cricket preparing for winter.

[quote]
Is it ethical to subsidize spendthrift parents [--] who do nothing and plan for nothing[--] with subsidized loans and grants?

[/quote]
</p>

<p>Driver, I assume you meant, "Taxguy's question was answered by the second part of his own question." It wasn't my question.</p>

<p>However, if you meant that the "frivolous cricket" was being rewarded, and that answers the question as to how the saver is penalized - yes, that too is a problem: once again, the famous "opm" - "other people's money" - is being wrongly used.</p>

<p>However, I was still on part one, and the fact that a frivolous spendthrift gets aid has nothing whatsoever to do with the fact that someone cannot be described as being "penalized" for not getting something that wasn't his to begin with - the choice of words is wrong. Financial aid is a gift, not an entitlement.</p>

<p>before anyone cries foul (it's playoff time), pls go back over the xx years and calculate how much in taxes was saved over the kids lifetime while the money was in their names. </p>

<p>Moreover, IMO, its the financial advisors who fail to point out that saving in a UGMA is only for those who know in advance (with perfect certainty) that they will not be eligible for need-based adi. Again, IMO, they should be held accoutable - even to the point of filing a malpractice claim.</p>

<p>p1 Yes, having UGMA saved us taxes but also force me to be more creative and careful with his money.
p1+. He has paid taxes since 12 and has a large potential tax liability for cap gains unless we manage the assets well. His tax liability is why I recommend that you go git yeeself a tax program, a financial program and maybe, finance for dummies. Plus talk to MANY tax planners/financial types. </p>

<p>p2. As Tiger Woods knows, if you don't hit the ball hard enough, you will never sink the ball. Which means, if you are going to save for college, then you'd better save big, aim for the top, and guide the sprout to achieve more. If you and sprout don't accomplish the goals, at least you can say you tried and being par is better than bogey. And having par, is still in the money.</p>

<p>p2+ if you think that kid isn't deserving for UGMA, you'd know it long in advance before college. There are ways to spend down the UGMA or protect the UGMA from the kid. </p>

<p>p2++ Just a new thought. Let the kid have the highly appreciated UGMA prior to majority age. Can you figure the tax liability to the kid, if the UGMA is liquidated within a calender year. IRS hell plus Garnishment for life!!</p>

<p>I find the ethics of applying for financial aid fascinating. We started saving for the kids' college when they were born, and are fortunate that their college funds actually are covering most of the expense of two private colleges. However, we also made a conscious decision not to apply for financial aid, although on paper we probably could have looked pretty good. </p>

<p>It would have required judicious choice in the schools--applying only to those that don't consider home equity, since we own our home without a mortgage--but it would have worked, probably, since at the time neither of us were working, thanks to my husband's cancer (he's in remission now, before you worry). </p>

<p>Would it have been ethical? We could have used the kids' college funds to pay for their private schools, then asked for aid, manipulating our finances appropriately.... We could have written special circumstances sob story letters about how much chemo costs.... (Smith invited us to do exactly that.) Ultimately, we decided to use the kids' college funds to pay for college.</p>

<p>But I do know people who have moved money around, manipulated business expenses for that key baseline year, and more, to make sure they get that discount. Frankly, I don't know how they sleep nights.</p>

<p>Dmd77 asks,"Frankly, I don't know how they sleep nights."</p>

<p>Response: They probably sleep very well laughing all the way to the bank.</p>

<p>You know, taxguy, you may very well be right. But I have to assume some day their greed will catch up to them.</p>

<p>so that we can definately understand what each is definetely describing. </p>

<p>Non financial aid: unsubsidized stafford loans. Non capitalized PLUS loans. Merit awards and grants. </p>

<p>Financial Aid: Everything else. </p>

<p>This is really a tale for the class of 2010 and perhaps late 2009.
At CMU, If you want a loan of any sort, you must do annually FAFSA, CMU FinAid App form, full and signed federal tax forms (at least for us and kid), and I believe something else that always slips my mind, to renew any institutional grant and/or "non financial aid." I KNOW THAT WE DO NOT QUALIFY FOR FINANCIAL AID, but we have to fill the forms out and even check the box, "unsubsidized" and not capitlized-deferred. And every year CMU and the loan agent sends us letters informing us that we do not qualify for subsidized financial aid programs-DUH. Then we wait. Then I call them up to find why the approval is taking so long. And then I fax them the form they are missing. And we wait. Then I call them up again and they say -didn't receive fax. Then I mail the form to the kid so he hand delivers the form to FA, and they say, "already got everything." All of this documentation and forms that they want says that WE DO NOT QUALIFY FOR FINANCIAL AID. </p>

<p>We are not pleading for FA. We are asking for a loan that we pay interest on from day 1, and afforded by law to everyone. </p>

<p>House allegory: You can pay cash or you can get a loan. If you pay cash, then you are giving up rate of return of 4+% and stop paying taxes or you can get a loan at 2-3% *and continue paying taxes. Everyone should be happy that we pay taxes. Right?</p>

<p>Has Paul Harvey says, "Now you know the rest of the story!"</p>

<p>definitely true for the grammer police.</p>

<ul>
<li>Rate of return and loan rates are not current rates, for illustration purposes.</li>
</ul>

<p>taxguy: so where did DD end up?</p>

<p>NYT is correct if you have successful funded COA. </p>

<p>For the most part there just aren't any good alternatives and what alternatives that are available are sometimes huge bets on the future. If there is some way to soften the gamble such as a "future" market, I'd could have relaxed a little bit more in 2002 and 2003.</p>

<p>Let's not forget that we have a consumer driven economy and that to a certain extent, it is those people who spend all of their discretionary income on stuff that are responsible for keeping the economy humming which causes the value of our retirement and college savings accounts to increase.</p>