Goodbye Assets

Catherine Horiuchi

MY TWINS ARE SENIORS in high school. That means, pandemic or no pandemic, we spent the fall applying to colleges.

Here in California, the pandemic closed public schools in March and most did not reopen for in-person teaching with the start of the current academic year. That forced parents to stand in for college counselors. The preparations high school juniors usually engage in, such as visiting colleges and taking standardized tests, didn’t occur this past spring or summer. Student athletes spent the summer practicing in parks and driveways. Grades suffered under remote learning. For all these reasons, applying to college has been more difficult.

And then there’s the price tag.

Post-secondary education can be relatively inexpensive—or it can break the Bank of Mom and Dad. The federal government supplies some grants and many loans to limit the immediate financial damage, and colleges also dole out money from their own funds. Still, the student loan crisis is front page news. That’s one reason so many parents try to ensure their young adults don’t leave college with crushing debt.

The federal government’s role begins with the Free Application for Federal Student Aid, or FAFSA, with “free” meaning it doesn’t cost you to ask. FAFSA calculates a family’s expected family contribution (EFC) based on the parents’ and student’s income and assets. On top of that, colleges use their own guidelines to distribute the grant money they control.

For families earning below about $50,000, the EFC will likely be $0. After that, the amount rises sharply—and sometimes unfairly. For instance, middle-class single parents, along with older parents with a healthy amount of savings, may be shocked by how much they’re expected to pay toward college costs. There’s no way to sugarcoat it: Parents with decent incomes, or who’ve successfully set aside a chunk of money, end up paying plenty when their kids go to more expensive colleges.

Consider the parents’ assets. In broad terms, the EFC assumes parents will put as much as 5.64% of their wealth every year toward college costs. We’re talking about things like money in bank accounts, regular taxable brokerage accounts, parent-owned 529 plans and second homes. The good news: A few key items are excluded, such as money in retirement accounts and the value of the family’s primary residence.

Imagine you’ve carefully saved $100,000 outside a retirement account to serve as an emergency fund to cover six months of troubles. If your assets are assessed at the full 5.64%, you will lose $5,640 of the $100,000 in year one. The next year, you’ll be expected to put 5.64% of the remaining $94,360 toward college costs, or $5,322. In year three, you pay 5.64% of $89,038, equal to $5,022. At the start of Junior’s senior year, $84,016 remains in your emergency fund. The last bite will cost you $4,739, leaving you with $79,278 and a slow road to building your emergency savings back to its pre-college value.

Oops. The problem: Few students graduate in four years. Some can’t get required classes or change majors. Many interrupt their college years with work or other activities, or they drop out entirely.

The National Center for Education Statistics reports that it takes six years for 62% of incoming public university freshmen to graduate. The number rises slightly to 67% for private nonprofit schools, but drops precipitously to 25% for private for-profit schools. The six-year rate varies based on school selectivity, with a six-year graduation rate of 90% for schools with selective acceptance—meaning just one out of four are admitted—but only 34% for schools with open admissions.

Add those extra two years for your no-longer cherubic child, and your emergency fund drops to $70,587 (with contributions of $4,471 in year five and $4,219 in year six). By then, Junior’s sister could be well along in her six-year undergraduate degree, each year with its own continuing bite out of your non-retirement investments.

Numerous projections have suggested that slightly more than a third of all jobs in the near future will require a bachelor’s degree. Many respected and well-compensated professions require no more than a two-year degree in a specialized program, which your child can earn at  a nearby community college.

The upshot: It’s a wonder more parents don’t question the traditional undergraduate college experience. I fault the “college prep” track, which is the principal goal of most public high schools. My advice: Talking through the myriad college options, and how to pay for them, is a homework assignment that needs to be completed by all high schoolers—along with their parents.

Catherine Horiuchi recently retired from the University of San Francisco’s School of Management, where she was an associate professor teaching graduate courses in public policy, public finance and government technology. Catherine’s earlier articles include Leaving EarlyGood Company and From Two to One.

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