Ah, college! Thanks to the combined effects of selective memory and university alumni associations, most adults think of college with a warm glow of nostalgia--all that lounging with a book on the marble steps of pillared buildings, tossing Frisbees across grassy quadrangles, studying in leafy courtyards sprinkled with amber late-afternoon sunshine, eyeing cute lab partners over beakers and Bunsen burners. After graduation, most adults get a kick out of dressing their tots in tiny college sweatshirts, daydreaming vaguely about that far-off day when their child, too, will walk across the stage in mortarboard and tassel.
But suddenly little Jeremy or Jessica is a high school junior brandishing college brochures, and just as suddenly, those nice daydreams have sprouted a price tag--and a huge one at that. The parents' collegiate enthusiasms get squashed like a bug beneath a hardbound copy of The History of Western Civilization. "This is going to cost me how much?" "I have to pay for this when?"
Apoplectic, sticker-shocked parents are frequent visitors in the Alameda, California office of Judy Miller, who revamped her comprehensive financial planning practice last spring to focus solely on college financial planning and college admissions strategies. Most parents don't really comprehend how much their child's university diploma will cost them. Miller estimates $16,000 a year for a California resident attending a state institution, while the College Board estimates an average of $27,700 per year for a student attending an out-of-state private college. Yet an astonishing 95% of parents have not saved a cent for their children's college educations, she says. It's a stunning percentage, given both the burgeoning cost of college and the growing number of jobs requiring advanced degrees. "I had a family in here on Saturday--they're carrying credit card debt, they haven't saved any money, and their son is a freshman in high school," Miller says. "The parents were very embarrassed, and I told them, 'Look, there's no reason to be; the vast majority of the American public has not saved for college. You are in a very large pool." While the current college funding buzz has centered on the benefits of state-sponsored 529 plans (see "Miracle Growth" on page 58), her firm targets parents who haven't saved and have only a few years left before their child heads off to campus.
"I would love it, absolutely love it, if the 529 plans would put me out of business," says Miller, 57, a bubbly English teacher-turned-banker-turned-planner who seems never to have quite gotten over her love affair with education. "I hope they do, and I'm preaching about them to everyone who calls." In fact, when she launched her comprehensive financial planning practice in 1995, she intended college savings strategies to be her niche and the cornerstone of her business. But she couldn't get the savings message to stick. "People will get all excited about savings plans when they're talking to you and may invest," she says, "and then the first time money gets tight--and when you have young children, that happens often--the first thing to go is the college savings plan." Fortunately, there are a host of other ways to make college affordable, and it is the focus of her newly styled "college solutions firm" to bring method to the madness of federal financial aid, grants, loans, scholarships, university selection, and the process of applying to college.
615 Sand Hook Isle
Alameda, California 94501
Practice founded: 1995
Number of planners/staff in office: One
Number of clients of the firm: Twenty families
Compensation method(s): Fee-only
Average fee for a comprehensive financial plan: Various modules ranging from $900 to $3,500
Fee for managing assets: NA
Hourly rate: $125 per hour
Client demographics: Families, primarily in California, with college-bound children in junior high and high school. Family income generally ranges from $80,000 to $200,000.
Education: BA in English and MA in education from Temple University
Previous incarnations: Assistant vice president of Citicorp, director of administration for a start-up company, staff writer, junior high and high school English teacher
Professional designation(s): CFP
Outside interests: Gardening, camping
Making Sense of Financial Aid
This fall, according to the National Center for Education Statistics, more than 15 million bright-eyed young people will lug their backpacks into the hallowed halls of American higher education. More than 60% of the ones attending public universities will have received some type of financial aid, according to the College Board; for students attending private colleges, the percentage will surpass 75%. Financial aid is offered by the government and by individual colleges in the form of grants, scholarships, and subsidized or unsubsidized loans, and its disbursal can be based on the student's academic or extracurricular record (merit-based aid), or on his family's financial situation (need-based aid).
Most of Miller's clients have no idea how much need-based financial aid they qualify for. Some clients with $50,000 incomes have mistakenly assumed that they earn too much to qualify, while other clients earning $250,000 a year have been stunned when they discover they don't qualify for a penny. The average person might think that the amount of federal, need-based financial aid a family receives would remain constant no matter what school the student attended, even if aid supplied by the college itself (known as institutional aid) varied from school to school. But the average person would be wrong. "If you apply for financial aid from five different schools, you will feel like someone who has filed taxes in five different countries," says Miller with a laugh. "It's off the wall! The aid packages for one family can differ by thousands of dollars." And merit-based aid can differ widely from year to year, even at the same school. "One year, a college needed piccolo players, so piccolo players got very handsome aid packages," she says. "And then the next year, they didn't need them anymore, so, no more aid." How much aid a family receives depends on a sometimes complicated variety of factors, including how many children from one family will be in college at one time. Still, she adds, "the surest way not to receive any is by not applying."
Part of Miller's services includes helping client families fill out what she calls "the dreaded FAFSA" (Free Application for Federal Student Aid), the primary application used to determine a student's eligibility for financial assistance. After being sent to a federal processing center, the results of the application are sent to the universities of the student's choice for use in determining distribution of federal aid and, at some colleges, institutional aid as well.
Miller also helps clients fill out the PROFILE application, a form used by some private colleges to determine distribution of institutional aid.
The numbers are crunched somewhat differently on the two forms, but in both cases, need-based aid hinges primarily on four numbers: the parents' income, the parents' assets, the student's income, and the student's assets. An increase in any of these four pots of money will bump up the amount the family is expected to shell out from its own pockets (the expected family contribution, or EFC) and decrease the amount of aid offered. Miller uses a special software program, Wizard, to calculate EFCs according to the two methods.
Getting Their Share
To maximize the amount of aid received, Miller starts by examining the family's taxes when the student is a high school sophomore to make sure the family will not be receiving a large tax refund during the calendar year in which the student becomes a senior. Financial aid calculations for college freshmen are based on the high school junior-senior calendar year, and a tax refund that spring would boost the parents' income, decreasing aid. In addition, if the family has invested anything for the child's education, Miller ensures that the securities are sold early enough to prevent capital gains from showing up on the junior-senior year tax return. "And frankly, it's a pretty good idea to start being in cash positions at that point, anyway," she says; the last thing parents want is to watch Junior's college money plummet to half its value the day before he moves into the dorms.
I hate this stuff! I hate everything about what you're doing," the man cried. It was music to Judy Miller's ears. The man in question was a comprehensive financial planner from Sacramento, and he disliked the wrestling with complexities of college financial aid so much that he referred his clients with college-bound children to her. "You couldn't pay me to do this," he told her. "Am I ever glad to find you!"
Miller makes a point of handling college planning exclusively so that comprehensive financial planners won't fear losing their clients if they send them her way. "My business is set up so that if I discover in the course of my conversations that Aunt Tilly just died and left the family $300,000, that $300,000 will go right back to the comprehensive planner," says Miller, who charges project fees and doesn't manage assets. "My goal is to be a complement to them."
Indeed, if a client asks her to handle non-college-related financial affairs, she demurs, and will even call around to help the client find someone else to assist them. "Frankly, I'm a really good source of referrals, because I get people when they have this huge financial milestone in their faces," she says. "They're worried about paying for college, and that's making them take a look at retirement. They're going into their prime earning years, and most of them don't have planners."--Karen Hansen Weese
Easy so far, right? Not so fast, says Miller. While each of the four money pots--student income, student assets, parental income, and parental assets--affect financial aid in the same way (i.e., an increase in any of them will reduce aid), each pot affects financial aid to a different extent. Since students are expected to contribute 35% of their assets toward education while parents are expected to chip in only 5.6% of theirs, an increase in the student's assets will diminish aid more than a similar increase in parental assets. Miller received a phone call during one of our interviews that illustrates just how important this distinction is. "You won't believe this!" she exclaims as she hangs up the phone. "He said, 'Judy, I was able to refinance my condo'--and this is a rental property, not his primary residence--'I've got all the money out of it and I want to get that in Teresa's name because that's her college fund.' And I literally shrieked at him, 'No, no, no! You don't want it in her name! Don't do this to me!' And he says"--innocently--"'Golly! I don't?'" She shakes her head with a bemused chuckle. "This is a family with not a lot of money, living paycheck to paycheck and carrying some credit card debt. But because this condo was almost paid for and was a rental property, it bumped their assets way up there and knocked them out of the block for any kind of financial aid. Now that they've refinanced it and have a great deal of debt on it, their assets fall well within the asset protection allowance [they won't be expected to contribute any of their assets]. But, if they put the asset in the daughter's name, she'll be expected to contribute 35% of the value of it--and to do so every year. The daughter gets clobbered!"
Assets aren't the only potential pitfall; income can create havoc, too. Since college-bound kids are expected to contribute toward their education 50 cents of every dollar over $2,200 that they earn, Miller often finds herself in the odd position of telling well-intentioned students to stop working if they want to be able to afford college. "Here we want to be instilling values in young people, and yet, when it comes to financial aid, they're punished for it," she says. "I had a young woman recently who was earning a substantial salary, and I said, 'That's got to go!'--because they'll take 50% of the salary as part of the expected family contribution. And then, if she's put her salary in a savings account, they'll assess her for 35% of that because it's a student asset. It's a double-dip--she could be expected to contribute up to 85% of every dollar she earns."
The same double-whammy can also befall UTMA (Uniform Transfer to Minors Act) and UGMA (Uniform Gift to Minors Act) account owners. The UTMA/UGMA becomes an asset of the student when she turns 18, and if she sells stocks from the account and incurs a capital gain of $100, her aid will be reduced by $35 for the value of the asset and $50 for the income.
To avoid this eye-popping 85% "financial-aid tax," Miller helps certain students set up IRAs, where they can sock their income away from the prying eyes of financial aid formulas and draw upon the money for college without penalty, while also maintaining the option to save some of it for retirement. "You do have to be careful how you set the IRAs up, though," she cautions.
For other students, however, she simply recommends that they quit working. "And it's really not a bad idea," she notes. "Young people need a strong community service component for their college applications, and a strong extracurricular component. If they're carrying the academic load that they need to be carrying in order to be a strong candidate for admission, there really is not time to do all that, have a social life--which is also important--and hold down a job. Their 'job' is to be a student."
Choosing a College
There is a common misconception that unless a student is the class valedictorian, captain of the soccer team, first-chair violin in the district orchestra, and president of the Key Club, he or she will not qualify for merit-based financial aid. This is entirely not the case, says Miller. In a unique approach, she helps students maximize their merit-based aid by helping them choose which colleges to apply to.
This strategy might seem a little odd, or even a little intrusive, but Miller maintains that it's the only way that she can truly serve her clients. "I discovered with my comprehensive practice that if I did not have input into the school selection process, I was wearing handcuffs in terms of providing real assistance," she says. "I realized how intertwined merit-based dollars are with selecting the right schools." Choosing a college is an educational decision for the student, but it is also a financial decision for the rest of the family, and it's important to balance the two. "In guiding young people, my first goal is always to get the most appropriate school for the young person, where they're going to be happy," she says, "but it is also, hopefully, to have them applying to schools where merit aid may be a possibility." Miller admits that finding the "right" school is more of an art than a science, but "if you find the schools that are going to give them the education best suited to them, schools are very likely to complement that decision with financial aid in merit-based dollars that don't have to be repaid."
The search for schools starts in the student's sophomore year. Miller begins conversations with the student about his interests, and checks that his course load is commensurate with his college aspirations. She also encourages the student to read as much as possible. "The best preparation for the SAT isn't a prep course," she says. "It's to read extensively." When the junior year rolls around, she and the student, each armed with their own research, begin to draw up what she calls the "University of Jeremy" or the "University of Jessica" (or whatever the student's name is). "We ask, 'What does your ideal school look like?' We want to define that first, before we ever start putting names of specific schools on the table," says Miller. "And then we say, 'Okay, where do we find the University of Jeremy? Which schools actually match your criteria?'" By defining what they want before naming specific schools, Miller hopes to help students and parents avoid the national obsession with name-brand universities. "The name recognition obsession is a very expensive bad habit in this country. If I can get them to step beyond those top 50 or so really well-known schools in the country, there are a lot more opportunities for financial aid," she says. In fact, she prefers not to work with families who are intent on an Ivy League diploma. "The applicant pools are so large," she says, "it's like a dart throw to get in."
The most fun--or at least Miller thinks so--happens in the summer after the junior year, when the student takes his first crack at the college application essay. It's easy to see that the English teacher in Miller is alive and well; her enthusiasm is contagious. "In a way, there's more of the educator in me than the financial person," she says, despite the fact that she spent eight years as an assistant VP at Citibank, "so putting the two worlds together is just heavenly for me. When I was an English teacher, I loved teaching composition. And I've got the best of everything now, because these young people have a real motivation to write these essays."
Not only are the students motivated, they're tackling a style of writing that many of them haven't faced before, and being forced to step back and think about themselves and their identities in relation to the world. "These essays are all about 'Who are you? What is your passion?'" says Miller. "A lot of times, kids have not had to do that kind of thinking before in a writing assignment." Such deep questions can make for hard work on the part of both the editor and the writer, but the results make it all worthwhile. "My son called me the other morning and said, 'How are you?' and I said, 'Right this minute, I am in the stratosphere! One of my students has just faxed me the final copy of his essay, and it is so improved. I am so excited!'" She laughs cheerfully. "It's something money can't buy. I am just really thrilled when a young person gets into it, because this is getting into yourself, and who you are. It's enormously rewarding."
In the fall of the senior year, the student draws up a calendar of due dates for all of the college applications and financial aid materials. Miller works with the student to educate him about personal finance, particularly credit card debt. And when the financial aid award packages arrive in the spring, she meets with the family to dissect the offers and choose the one which best meets their needs. "I can tell them what kind of loans they've been offered, or what other options they have, and help them look at the costs associated with each one," she says.
And in June, as a crop of 18-year-olds fling their hats into the air to the tune of Pomp and Circumstance, Judy Miller celebrates, too. Her students have successfully chosen a college that matches their interests and desires, and one that their families can afford to send them to.
And even better, in a few more weeks, she'll have a whole new set of essays to look forward to.