For many years I was a financial journalist who wrote about such garden-variety investment topics as 401(k)’s, IRA’s, mutual funds, bonds and how investors can assemble a retirement portfolio that will last longer than they do.
I enjoyed what I was doing until I stumbled across a financial topic that I knew nothing about when my daughter was in high school. I had no idea how parents can take whatever they have saved for college and stretch it as far as possible when their teenagers are in college.
I was stunned that I couldn’t find information about how to shrink the cost of college when the expense is looming. College, after all, is often a family’s second biggest expense after buying a home. Financial journalists, however, are typically busy writing about 529 plans and how families with young children can handle the expense if they start saving early. And that used to describe me. That advice, however, is worthless for parents with teenagers.
Why the Financial Industry Ignores You
The financial industry has also blown off the needs of parents with college-bound teenagers because there isn’t enough money in it to make it worthwhile. The industry’s focus is on retirement and wealth management because that’s where the big bucks are. You will find lots of advice on websites of brokerage firms about how Americans can stretch their retirement account assets once they need the money, but I’ve yet to find one of these site that provides advice about stretching college dollars. Sadly, financial advisors understand little to nothing about this critical financial issue.
And, of course, high school counselors, rarely know anything about evaluating schools financially. They think they are off the hook by inviting some college reps to their high school once a year to talk about completing the FAFSA. How inadequate is that? Here is a post on this topic:
Because of such a stunning lack of information about making college more affordable, I decided to ditch all my other financial writing and plunge into the murky higher-ed world a few years ago. Writing about college issues, when hardly anyone else is, is certainly more fulfilling and a heck of a lot of fun!
Snake Oil Salesmen
There are many serious consequences for the widespread lack of knowledge about college financial issues in this country. One of them is the proliferation of snake oil salesmen. Some so-called financial professionals, mostly guys selling insurance, think the solution to every family’s college funding problem is to buy an annuity or a life insurance policy.
I get occasional emails from families who encounter these insurance agents. Here is an email that I received this week:
We are working with a college planner who has advised us to refinance enough to take out $200,000 in cash to put into a Covenant II whole life insurance. He explained to us that this way the cash will be protected from FASA and we can withdraw to pay for our three children’s college funds starting 2013. He recommended withdrawing $50K in 2013 and $75K in 2014 & 2015. We have a junior in UCLA, freshman at LMU and a high school senior…I read in one of your blogs that this is not a wise option can you explain more on that? I am so confused. Any help will be greatly appreciated.
Hiding Your Home Equity
Buying an expensive insurance policy to hide assets from colleges is a bad idea for Ann and her family, but it’s a great move for the insurance salesman because he’s going to pocket a fat commission. It’s highly unlikely that this agent knows anything about college funding. Here are a few reasons why:
The vast majority of colleges in this country don’t care how much home equity you have. They don’t even inquire if you own a house! Schools that fall into this category only use the FAFSA to determine who receives financial aid. UCLA is one of those schools.
Hiding assets wouldn’t qualify your child who attends UCLA for money. In fact, if you make more than roughly $80,000 adjusted gross, it’s extremely unlikely that UCLA or any of the other University of California campuses will give you a dime regardless of whether you rent a basement apartment or live in a Malibu beach house.
CSS/Financial Aid PROFILE
Some private schools, which use the CSS/Financial Aid PROFILE, in addition to the FAFSA, do ask about home equity, but these schools routinely cap home equity with a formula tied to the family’s income. When I looked at the PROFILE schools list on the College Board website, I didn’t see Loyola Marymount University, which means it probably just uses the FAFSA and possibly a supplemental in-house form.
Here is a previous post that I wrote about home equity and college:
Beyond being UNETHICAL, hiding assets in annuities and life insurance can backfire. Schools that use forms beyond the FAFSA may consider the value of retirement accounts and other investments such as annuities and life insurance.
What could help this family obtain more money is having three children in school at one time. The family’s expected family contribution dropped by half with two in school (according to the FAFSA formula) and will shrink further when three are in school.
Here’s another practical consideration: more than 96% of families don’t own enough assets to hurt their chances of financial aid at all. To learn more read this:
The best way to shrink your college costs is to become an empowered consumer by educating yourself. And stay away from snake oil salesmen!
Lynn O’Shaughnessy is the author of the upcoming second edition of The College Solution: A Guide for Everyone Looking for the Right School at the Right Price.