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College Crapshoot

Catherine Horiuchi

A LIFE OF FRUGALITY might mean your children graduate college debt-free, which is a major accomplishment. But what about your happy-go-lucky neighbors, who spent every dime they earned and never saved for college?

At issue here is the Free Application for Federal Student Aid (FAFSA), which is the basis for the all-important expected family contribution (EFC). The whole thing can seem like one big crapshoot, as I can now attest.

The EFC may determine that your spendthrift neighbors’ kids also get to graduate debt-free. Alternatively, even though they have no assets to be assessed, the EFC may require a substantial contribution from their income each year. On top of that, even an EFC of zero is no guarantee that a university will offer your child a full ride, plus the aid package may include substantial loans rather than much-coveted grant money.

Retirement accounts are ignored in the FAFSA calculation, as is home equity, though some colleges may look at both when doling out the financial aid they control. Still, prioritizing retirement accounts and building up home equity is crucial if you’d rather not be expected to spend a quarter of your net worth or more on college costs.

Once the FAFSA is filled out, your EFC is instantly displayed onscreen, formulaically derived from investments, income and “prior prior year” tax returns. For a thrifty soul like myself, the EFC is trouble and, indeed, double trouble with twins. Worse, in another three years their younger brother could also start college, leaving me with a trifecta of savings-chomping scholars.

Recently passed by Congress, the 2021 omnibus spending bill includes changes to simplify the FAFSA process and dumps the term EFC, with all its negative baggage, replacing it with a new “student aid index.” We’ll learn more when the index is implemented for next year’s financial aid cycle.

My EFC this year doesn’t reflect the loss of my husband’s income, the fact that I stopped working after my husband died to stay home with the kids, that I have no employment income this year and that my twin daughters will lose their survivor annuities when they graduate high school. The FAFSA cheerily assumes that all sources of income will continue, that you won’t be needing emergency fund dollars and that it’s pretty easy to save for a secure retirement.

Should my girls get accepted to their dream school, I can write the school’s financial aid office and see if the college has anything to offer. This is an inefficient process, but better than nothing. It’s possible that, in the end, they’ll receive only loans.

I have yet to decide how I feel about these very young adults incurring debt. It seems obvious that 18-year-olds, who haven’t worked or saved much, can’t understand the effort required to pay off loans. Nor are they able to weigh the long-term consequences of spending borrowed money to earn a degree with a demonstrated low return on that financial investment.

In December, John Bogle’s Little Book of Common Sense Investing accompanied my holiday letter to my twins, encouraging them foremost to continue their fiscal education. In that note, I made this promise: “If you do well in college, I will help pay till you get your undergraduate degree. If college doesn’t go well, or you find opportunities that you prefer to college, it’s fine to get started in a job and a life and career right away.”

So where does all this leave my daughters and me? Here are five takeaways:

  1. Loss of a spouse is the gift that keeps on taking. In terms of the current FAFSA, a single-parent family receives less than half the income protection that couples receive.
  2. It bites to see a large dollar number spit out of the EFC formula. But look at it instead as a measure of success. I created the potential for a debt-free college education because, as a younger parent, I believed that was an important goal and worth saving for.
  3. The EFC doesn’t necessarily determine what I’ll pay next year for my twins’ college education. I could pay much less if they decide on community college or a state university, or if they attend college near home so they save on room and board. Or I could pay much more, by caving on expensive dream college or falling back on the necessary safety school. If you look to be paying plenty, have a frank talk with your young adults. Maybe you’ll agree to pay for one year only, with all subsequent years dependent upon making a “B” average. Or maybe they should take out loans or work summers to have more skin in the game.
  4. There are nearly 5,000 two- and four-year degree-granting institutions in the U.S. Most are eagerly looking for students who will succeed based on each school’s strengths and attributes. Studies suggest that, for most students, limited advantage is accrued by paying top dollar for an elite degree.
  5. The pragmatic and practical thinking of a tuition-paying parent can be quite distinct from the diffuse interests or starry aspirations of the senior selecting a school and course of study. Be kind to each other. Both are right. Neither is wrong.

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. Check out Catherine’s earlier articles.

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Catherine
Catherine
5 months ago

I didn’t even mention the CSS Profile here! : )
Thought I avoided that extra level of financial disclosure, but no, one of the colleges came back and asked for me to submit that as well. The CSS Profile requires a person to disclose both one’s home equity and retirement accounts. Surely schools do not expect parents to take out mortgages or spend their retirement funds, in order to pay for college! Either of those would be a terrible choice for parents, who even among the youngest are in middle age, and the oldest senior citizens with no time to re-earn the income to pay off a second mortgage.

MrAtoZ
MrAtoZ
5 months ago
Reply to  Catherine

Having been asked by a selective private school to augment the FAFSA with a CSS, I’m sure that the college absolutely expects me as a parent to dip into retirement, other savings, and perhaps even home equity!

Andrew
Andrew
5 months ago

Great comment–thank you for posting. Another key is to have your child be an attractive applicant to a school with resources. This could be any skill, interest, or accomplishment (sports, arts, academic)–not all students are equally valuable to the college they apply to, and that is not widely advertised.

IAD
IAD
5 months ago

Timely…and painful article. I have four children, one just graduated from college, one a senior in high school, and two in college. I make a great salary as does my wife due to our location. That location also brings higher than normal expenses like housing. We live frugally, but from an EFC perspective we should be paying $38k per year per kid. Realistically, we can swing around $12k per year. Thankfully, we saved in each of their 529, but no where near enough.

What we have done is agreed to pay the room/board/fees for our kids and they cover tuition. They can do that by working during the summer or loans. This has had some unexpected benefit as they now have some teeth in the game. They can blow off a class, but they paid for the class they are blowing off. Tuition has become personal to them. Once all four are done with school, we’ll circle back and help out with the loans, but its just not something we can do at the present.

With our high schooler, he is looking at the community college route. Amazingly, the tuition is just $75 cheaper per credit than our state’s average tuition. The savings is not in the tuition, but all the other fees and room/board.

If nothing else during the pandemic, I think a lot of people are putting more thought into college costs, the value and the return on investment.

parkslope
parkslope
5 months ago
Reply to  IAD

I would add that college ROI data don’t control for the fact that high ability high school graduates are much more likely to attend prestigous colleges. IMO the higher ability of students admitted to prestigous schools is the main reason why those schools have higher ROIs despite their higher costs.

Catherine
Catherine
5 months ago
Reply to  parkslope

Fair point, I would say that many of them have a higher degree of preparation and a more comprehensive set of externals supports as well.

Catherine
Catherine
5 months ago
Reply to  IAD

I appreciate that you are sharing your strategy which I imagine is being refined as each of your children passes into adulthood. There are millions of families ( IMO as a former university administrator ) who have inadequate and incomplete information on how to assist their young adults who are trying to figure out what they will do and what preparation will be essential to get there.

dl777
dl777
5 months ago

My 18 year old son just decided to not go back to a $32,000/year private college after his first semester there in favor of rolling his own software development education via FreeCodeCamp, other free online resources or possibly a $15,000, 15-week coding boot camp. I think it is great as I feel universities have become bloated, entitled organizations. We recognize there are some risks but we think he can work through them.

Catherine
Catherine
5 months ago
Reply to  dl777

A teen who wants to follow a clear and established course like your son has proposed is likely well situated for success. Honestly there are many firms that will help him pay for college, later, once he is in a job and it makes good business sense for him to get his degree. The Georgetown “First Try at ROI” site includes a column “average age at entry” and it’s not all 18 year olds. Any tradition of “straight from high school into college” has to be weighed against current conditions and future expectations, hopefully carefully considered by all affected parties. Many, many undergraduates students are now “nontraditional”, that is, outside the 18-22 range.
He could spend 4 months and $15k, work for a year as a programmer (making back the entire investment, and then some), and decide to become a poet, or a tennis coach, or go back to school to study electrical engineering in earnest. He might even be able to get hired without such a course (I am thinking of one person who applied for a niche tech job on Friday, bought a book that evening, worked all the exercises in all the chapters, and got hired on Monday morning.) Many valid paths to a constructive adulthood.

Catherine
Catherine
5 months ago

Your optimal strategy certainly would result in a minimal expectation for any family contribution in particular.
One wonders, in this era of higher education constraints, with few schools sitting on fat endowments or generous contributions from state legislatures, when it might help a student be admitted, on the margin, knowing the school would not have to discount its price to near zero in order to admit them?
The University of California fell into a PR trap and had to face the wrath of the legislature for admitting more out of state students and fewer California students, to improve the bottom line.
Schools still must pay for staff, faculties, heat, lights, gyms, cafeterias, grounds upkeep, libraries, building maintenance, health insurance and other benefits. Someone has to pay for colleges.
I don’t mind paying for higher ed in principle, if I think the expenditure will result in more opportunity and greater life satisfaction or community contribution from my kids. It’s only when I think the cost might be ten years of every penny I saved, and the trips I didn’t take or nice things I didn’t buy to have saved this sum, that I hope my kids and I agree on the right school at the right price.

stelea99
stelea99
5 months ago

One topic often ignored by these types of discussions is the cost of the education vs. likely income the education will generate to help repay the loans. This is a tough love type of topic. Students entering higher education often do not know what career they will pursue. Unless they are advised to at least think about how much they will likely earn with their future degree, they might incur debts that they not only have no hope of repaying, but that will impair their financial situation for their entire lifetime. Attending a top tier private university and incurring $200,000 in debt to become a teacher who in many states will never earn enough to repay the loans is an example of such a bad outcome.

Catherine
Catherine
5 months ago
Reply to  stelea99

Perfect example. The linked Georgetown ROI site intends to roughly inform parents and potential students. Most can earn a public school teaching credential at a fraction of the amount of a private education, where local community colleges can get a person halfway to their credential at an extremely cost effective point.

johny
johny
5 months ago

My wife and i ate dirt for the first 15 years of our marriage. This spirit simple living and investing has enabled us to pay for college without loans, payoff our mortgage prior to retirement and reach financial security by 50 on one income. You can probably tell I am a studious pupil of Mr. Clements.

Peter Blanchette
Peter Blanchette
5 months ago

Years ago I started working with a widow in her 30’s who had 3 kids. Her husband died in a car accident a few years earlier. I remember her tellling me at the time that she felt very lucky because she and her husband had purchased life insurance soon after they were married. She would often tell me very proudly that she knew her kids would be able to afford colllege due to their purchase of life insurance. You never know what tomorrow brings. Those who try to prepare for as many eventualities as possible in life are the ones who have the best chance of succeeding financially. All this talk of timing the market, small stocks, large stocks, hot tips, options, Roth conversions etc are meaningless if you do not have an overall plan. Too many small investors do not have a strategy but are filled with a lot of tactics that often are useless when the chips are down.

Roboticus Aquarius
Roboticus Aquarius
5 months ago

Man plans, God laughs.

We had a plan for college saving, but frankly, it mostly failed. The idea was to put in most of the Christmas and Birthday money they got from relatives… but that turned out to be very unreliable.

We were pretty worried about college costs, but then we came to grips with the fact that our oldest may never go to college, long story.

Our youngest then falls in love with one of the most expensive schools in the nation.

The thing about these schools, though, is people rarely pay full price. Youngest was accepted to the dream school, with a 70%+ discount on tuition & board via scholarships. It’s still a fair sized annual payment, but it’s virtually the same price as the state university ten miles down the road would have been.

greglee
greglee
5 months ago

Why go to college? To increase your future income? No, that’s for vocational school. The traditional idea of college education is quite different, concerning history, art, literature, philosophy which I gather the author regards as airy aspirations. If you catch your child harboring such notions, you must disabuse him/her.

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