Extra Credit

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.

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.

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.”