By Michael Howell
​
In recent months, you may have read articles highlighting some new and improved benefits to the popular 529 college savings program as a result of the passage of the Tax Cuts and Jobs Act.
 
Specifically, the new tax law has expanded the use of 529 plans, allowing for up to $10,000 per year to be used to pay for tuition at elementary or secondary private and religious schools.
 
At first glance, this expanded flexibility is welcome news. After all, more versatility in most cases is a good thing. Except upon deeper inspection of the changes, the updates are of less value than most people think, especially for those of us living in California (keep reading).

A Quick Primer on 529 Plans
As a quick primer (or reminder) of how 529 plans work, the core benefit of the program is it allows owners to invest money using after-tax dollars toward future education expenses and capture tax-deferred growth. Fast forward to when education expenses come due, and withdrawals are tax-free so long as they're used to pay for qualified education expenses as per the IRS.
 
In other words, you can avoid paying tax on the growth portion of your 529, meaning less money going to Uncle Sam and more money going toward helping your student pay for education expenses.
 
Why the Change Matters
Prior to the new tax law, 529 assets could only be used to pay for college and higher education expenses. In my interactions with parents and grandparents planning for the future, this restricted usage of 529 assets is often one of the primary deterrents to a would-be 529 investor utilizing the program to save for college expenses. In these case, the driving concern is usually over the potential of a student deciding to skip college altogether and the money becoming subject to taxes and penalties.
 
So on the whole, expanding the flexibility of the program by allowing withdrawals to pay for K-12 expenses is undoubtedly an improvement, if ever so slight.
 
The bigger question is whether you should use 529 assets to pay for K-12 expenses?
 
A few words of caution…
 
The Funds Can Only Be Used to Pay for K-12 Tuition
You'll notice in the above primer on 529 plans that I mentioned 529 withdrawals are tax-free so long as they're used to pay for qualified education expenses.
 
Per the federal guidelines, the definition of a qualified education expense now depends on whether your 529 funds are used to pay for college or private K-12 expenditures. If the withdrawal is made to pay for a college bill, qualified expenses include tuition, room and board, books/supplies, and specific technology items like computers. In contrast, withdrawals related to K-12 costs are only applicable toward tuition.
 
As small as this difference may seem, it's significant enough to get someone in trouble. That means no using 529 assets to pay for your high school student's computer, books, or charging them rent for the privilege of living under your roof (as tempting as that may be)!
 
In This World, Nothing is Certain but Death & California State Taxes
Remember how I mentioned that 529 withdrawals are tax-free if they're considered qualified education expenses? Well, they're only tax-free if we're talking about federal tax and if the state you reside in follows the same federal guidelines.  
 
Unfortunately for Californians, if a parent withdraws money out of a 529 plan to pay for K-12 expenses, it will be considered a non-qualified distribution for California tax purposes. Without getting too technical here, this means that a portion of any 529 distributions used to pay for K-12 expenses would still be tax-free for federal tax purposes, but would be considered "taxable earnings" for California state tax purposes. Also, the taxable portion of any non-qualified 529 distributions would be subject to a premature 2.5% withdrawal penalty in California.
 
When the purpose of putting money away in a 529 in the first place is for the tax-advantaged growth potential, this should be a deal breaker for most Californians, at least for now. Should Sacramento decide to update and adopt the federal guidelines at a later date, this would make the benefit worth considering.

​Consider the Trade-Off
Lastly, consider the trade-off of using 529 assets to pay for secondary or high school expenses. At its most practical level, dollars used to pay for private K-12 schooling will mean fewer dollars available to help pay for college expenses. Not to mention, dollars withdrawn early from a 529 are no longer invested and compounding over time, which means less money for college and a lower tax benefit.
 
Remember the primary tax benefit of a 529 plan is tax-free growth. A 529 plan with an investment held for 3-5 years has far less growth potential than an investment held for 15-20 years. So any tax benefit that would come from using 529 funds to cover private K-12 expenses would be negligible at best because the investments just aren't given as much time to compound and grow.
 
This is why investing early in a 529 plan when a child is a baby makes so much sense. An investment timeline spanning nearly two decades can allow for a more aggressive investment plan. The longer the assets remain in the plan, the higher the growth potential and tax benefit over time.

So in this advisor's opinion – if paying for private school is important to you, you're better off utilizing your cash flow and other means to pay for tuition expenses.

​If you're using a 529 plan to save for college—my advice is to save early, save often, and hear the whispered words of wisdom in Paul McCartney and "Let it Be!"

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
 
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

WHY SOME PEOPLE PAY FULL PRICE FOR COLLEGE

Most people don't pay full price for college. If you've read any prior College Focus Newsletters or watched any of the workshops, you may already be aware of this.

But an analysis of data collected from the U.S. Department of Education provides insight into who pays full price for college and who doesn't. Nationally, only 25% of freshmen and 38% of all undergraduates pay the full sticker price.
 
At state universities, only 29% of freshmen pay full price while just 14% of freshmen at private colleges do. The students most likely pay the sticker price for their bachelor's degrees attend these types of universities:

• Public universities
• Ivy League universities
• Most selective colleges

 
Students who are more likely to skip paying full price attend these institutions:

• Small colleges
• Less selective universities and colleges
• Historically black institutions
• Southern colleges

 
Below is an analysis conducted by Mark Kantrowitz, the publisher of Cappex, a popular college admission website. Kantrowitz's analysis shows that the more selective the college is, the more likely students are to pay full price. You can see this phenomenon in his chart below:

The most elite research universities with their extremely high rejection rates can charge full price to wealthy students without depressing their applications. Many high-income parents will also pay full price (willingly or not) if their students get into elite trophy schools. And that’s true even though the price of a bachelor's degree at some of the most coveted universities has no reached $300,000!
 
Universities in this exclusive category include:

• Brown University
• Dartmouth College
• Georgetown University
• Harvard University
• Massachusetts Institute of Technology (MIT)
• Princeton University
• Stanford University
• University of Pennsylvania
• Yale University

 
It's possible many of the schools like the ones above could double or triple their price and would still have no trouble attracting more than enough applicants.
 
It's the same story with the most elite liberal arts colleges that are also perched at the top of their U.S. News & Work Report category. Despite having less visibility than their highly ranked research university peers, the highest ranked liberal arts colleges don't provide any merit scholarships:

• Williams College (MA)
• Amherst College (MA)
• Bowdoin College (ME)
• Swarthmore College (PA)
• Wellesley College (MA)
• Middlebury College (VT)
• Pomona College (CA)

 
While none of the above-mentioned schools so far provide merit scholarships, the most elite colleges and universities tend to provide the very best need-based aid for students. The challenge, of course, is getting admitted to these institutions.
 
Application: If you are a parent unlikely to qualify for need-based aid due to your income and assets, you can expect to pay full sticker price if your child is interested in schools similar to those mentioned above. If this is a concern, it may worth exploring excellent, but lesser known smaller colleges that can offer merit scholarships for your student. Similarly, if your student is likely to qualify for need-based aid and is gifted academically, know that aid is often readily available at these schools if your student is admitted.

​Q: In filling out the FAFSA (Free Application for Federal Student Aid), it asks you to report untaxed income. I'm confused by what this means?
 
A: This is a common area of confusion for many parents. Here are major sources of untaxed income that must be reported on the financial aid applications:

• Pre-tax contributions to qualified retirement accounts, including:
  • IRA's & SEP IRA's
  • 401(k)'s & 403(b)'s
  • KEOGH's
  • Tax-free contributions to health savings accounts (HSA's)
  • Tax-exempt interest income, such as from municipal bonds
  • Child support received
  • Disability and workers compensation, but not Social Security income
  • Untaxed portion of IRA's, pension and annuity distributions, such as the tax-free return of contributions from a Roth IRA

 
You also many have other items come out of your paycheck that you would not include in the above as untaxed income. For example, medical insurance premiums are not considered untaxed income. 

MERIT SCHOLARSHIP & TEST SCORE STRATEGIES
  
The sort of merit scholarships that a student receives from colleges will often partially depend upon a teenager's SAT or ACT scores. Solid test results can ultimately slash tens of thousands of dollars or more off the cost of a bachelor's degree.
 
This reality can be a tremendous source of frustration for those of you parents who have a teenager with solid academic transcripts, but struggles with these all-important standardized tests.
 
Here are four ways to either boost scores or make mediocre ones irrelevant.

1. Many schools don't care about test scores
​
There are plenty of schools that will make admission decisions without ACT or SAT scores. More than 900 colleges and universities do not require students to submit their scores for admission. This is great news for teenagers who are good students, but struggle with the standardized tests.
 
Many of these test­optional schools maintain relaxed enrollment policies, but there are a significant number of prestigious schools that have embraced the test­optional policy. Liberal arts colleges represent the largest percentage of these selective schools. Fifty percent of the top 100 liberal arts colleges, as measured by U.S. News & World Report’s rankings, are test optional.
 
Sampling of test-optional liberal arts colleges

• Bates College (ME)
• Beloit College (WI)
• Bowdoing College (ME)
• Bryn Mawr College (PA)
• College of the Holy Cross (MA)
• Eckerd College (FL)
• Furman University (SC)
• Kalamazoo College (MI)
• Mount Holyoke College (MA)
• Lewis and Clark College (OR)
• Muhlenberg College (PA)
• Pitzer College (CA)
• Saint John's College (NM)
• Sarah Lawrence University (NY)
• Sewanee-The University of the South (TN)
• Smith College (MA)
• Trinity College (CT)
• University of Puget Sound (WA)
• Union College (NY)
• Warren Wilson College (NC)
• Wesleyan University (CT)

2. It's easy to locate test-optional schools  

You can find the names of all test­optional schools by heading to the website of  FairTest: National Center for Fair & Open Testing.
 
I’d recommend using FairTest’s list of 275+ test­optional schools that are ranked in the top tiers of their respective U.S. News & World Report categories.
 
Once you've found some test­optional schools to research, pay attention to the test­optional fine print of each school. In the vast majority of circumstances, need-based aid is typically not impacted by a lack of test scores. However, merit aid can sometimes be impacted depending on the policy of the school in question. For those reasons, you should contact the admission office at a school and ask these two questions:

• Can anybody applying to your school choose the test-optional route or are there conditions?
• Are applicants who don't turn in their scores eligible for merit awards?

3. Check a schools net price calculator  

Using an institution’s net price calculator is often the best way to form a good idea of what kind of an award a child might receive based on his/her academic profile and test scores.
 
When using a school’s net price calculator (assuming it’s equipped to calculate merit scholarships), plug in your child’s ACT and/or SAT scores and grade point average when generating potential awards.
 
You can also turn to these calculators if you’re wondering if taking the SAT or ACT again is worth it. Let’s say, for example, that a child received an ACT score of 27. You could use the calculators of schools on the teenager’s list to see if getting a 28 or 29 would boost the award.
 
Net price calculators can also be valuable even if a child hasn’t taken the SAT or ACT yet. Parents can plug in different score scenarios to see how they could impact the awards at various schools.
 
4. Not all bad scores have to count 

​Schools benefit when applicants score as high as possible on the ACT or SAT. Prospective families will be more impressed if the student body at a school performed well on these tests. Consequently, it's in a school's best interest to generate the best scores possible for its applicants.
 
A popular way that schools enhance their applicants' scores is to cherry-pick their best subscores from the SAT or ACT when they've taken a test more than once. The practice is called superscoring.
 
Using the ACT, let's compare how traditional scoring works with superscoring.
 
Historically, college admission offices have used a student's composite ACT score that's made up of these four underlying categories:

• English
• Mathematics
• Reading
• Science

 
The testing service averages the four subscores (maximum score for each is 36), to create one composite average. Schools have traditionally only used the composite score rather than cherry-picking the best subscores. This practice penalizes teenagers who score better in some categories when taking the test more than once.
 
When superscoring, a college will select a student's highest ACT subscore in each of the four categories when looking at all the tests a student took and create what could be a more impressive superscore.

​Superscoring example:
 
1st ACT test
English                            26
Mathematics              25
Reading                          29
Science                           25
_________________________
Composite score:    26

2nd ACT test
English                             28
Mathematics               24
Reading                          30
Science                           23
__________________________
Composite score:     26

The overall scores for both testing dates is the same, but the composite score goes up with superscoring.
 
Superscoring result
English                          28
Mathematics            25
Reading                        30 
Science                         25
_________________________
Composite score:   27

SAT superscoring is standard practice at most colleges and universities. When a student takes more than one SAT test, colleges routinely pick the best scores from each SAT category.
 
In contrast, fewer schools have cherry-picked ACT scores, but that is changing with a growing number of schools now doing so. One thing you can do as a parent is to check with the colleges if they superscore the SAT and ACT.

​Q: How are merit-based scholarships calculated?
 
A: Every school will have its own requirements for merit scholarships. Beyond the very most selective schools, private colleges routinely discount the price via merit scholarships and/or financial aid to almost all students. You can use a net price calculator from a specific school to get an estimate of what your cost will be – minus any type of aid. You can Google net price calculator and the name of the school to find it.

Too often parents assume that getting into a prestigious college will guarantee a great job for their children by the time that they graduate.  That’s not, however, automatically true.

No matter what school they attend, it’s extremely important for students to hustle during their college years to boost their chances of transitioning into a good-paying career when they graduate.

One of the foremost experts on college and career issues is Jane Horowitz, a career-launch coach and founder of More Than a Resume.  Horowitz, a former corporate executive, has helped college students and young grads with majors as diverse as engineering, fine arts, computer science, sociology and banking.

While parents and teenagers are focused on picking the right academic major, Horowitz says what is infinitely more important is developing valuable skills in college and identifying them before tackling the job market.

The Game Plan

Below is Horowitz’s career blueprint, starting in a student’s first year of college. Parents, save the below as a resource. You’ll be grateful if it keeps your children from returning home after graduation rather than moving on with their lives and supporting themselves.

Freshman Year
The more you learn about possible career paths, the easier your transition will be from college to career.

Get Involved. Freshman orientation week bombards you with information about clubs and organizations. Investigate and join on-campus organizations that provide opportunities for you to develop skills, make connections outside the classroom and when the time is appropriate, lead activities to share goals.

Assess yourself as an individual. As a freshman, you get to reinvent your high school self.

• What am I good at—my talents and hard won skills?
• Values are your compass. What are my values?
• Everyone wants to do work that has meaning and purpose. What gives me meaning and purpose?

Don’t think majors. Think skills and job functions. Economists and business leaders do not know what jobs will be available when you graduate. The world of work is changing so rapidly. However, they can reasonably predict which skills employers will value and the essential functions needed in the workplace. Take courses to attain and develop these competencies.

Sophomore Year
It’s time to take control and focus your academic and extracurricular efforts and interests.

You majored in what? Ignore those critics. Not everyone is cut out for a STEM-based major and career and for most, there’s no linear path that takes you from a major to a career.  Art history majors become palliative care doctors, history majors become SEO specialists and philosophy majors become lawyers. Declare a major that aligns with your interests, but most importantly develops valued workplace skills.

Focus on a few vs. many things. Students, especially the success-minded ones, take on too many commitments. They think the more things they fill their resumes with, the better. The problem with this strategy is, if you try to do everything, you’ll be good at nothing. Employers look for candidates who demonstrate command of a skill and show leadership.

Master the informational interview. One of the best ways to learn more about a potential career path is to talk to people who are actually in that career.

Towards the end of the first semester, start to talk to alumni, your parents, and friends of your parents to see who knows someone in your field. It’s a great way to start building your professional network. And you’ll get practice interviewing.

Find a mentor. Faculty advisors, professors, and school administrators are important relationships, but are academic vs. work­focused.

Your school may have a formal mentoring program that matches students with an appropriate mentor, most likely alumni. You want a mentor connected to the career field you are exploring. Meet with a professional in the career services group and with someone in the alumni relations group.

Junior Year
Build your personal brand. Your major/degree is not your brand. Your GPA, is not your brand, nor is your school.
 
Craft your personal story. You want to be memorable as a whole person, and convey why an employer should care about you and what value you bring beyond skills and functions.

This is the story of you—a real person who knows what he or she does and why he or she does it. It's a unique way of describing yourself to people who don't already know you and informs them about your fit with the organization.

• Sign up with LinkedIn and create a profile page that tells your story.
• Create and practice your response to ‘tell me about yourself.’
• Write a keyword using, action verb oriented, accomplished-­based and personality-­rich resume and make sure it’s applicant-­tracking software (ATS) compliant. Yes, you need a cover letter.

Get experience. It’s time to give up the camp counselor job and get an internship. Internships are an essential part of the college experience. Internships provide you the opportunity to test­-drive a career field, make contacts, build marketable skills and figure out your likes and dislikes within specific fields and cultures.

Today’s graduates without work experience will stand little chance of securing a job after graduation. Getting that internship can be as competitive as getting a job at graduation.

Get into good physical and mental shape. You probably have some work to do to get back in shape. You do need to be concerned about the impression you make on job interviews. Employers fairly or unfairly make quick judgments about job candidates based on how they look and how they dress.

• Schedule classes during standard business hours of 8:00 or 9:00 to 5:00 to get accustomed to feeling mentally ready to think, converse and do at this time of day.
• Develop an exercise routine.

Senior year
Big dreams are great. If you don’t create space in your life for making progress toward them, then they’re fantasies. Turn a dream into a plan and work the plan to land your first professional job.

Develop a job­-search plan. You really do not want to leave launching your career to chance. Understand what it takes to find a job in today's job market and develop a targeted plan with goals, daily/weekly tasks and deadlines to work your way into the companies on your list.
 
Start your job search early. Landing a job in today’s market can take quite a bit of time. You have nine months from now until graduation. Between completing your coursework and planning for graduation, you have little time to search for a job unless you build it into your schedule. Plan and use this time wisely.

Be sure to attend career services sponsored career fairs and your department’s networking events. Take any opportunity to meet employers who are looking to hire young talent.

• Offers for accounting, engineering, management training, consulting, financial sector positions go out by December of your senior year. Most other positions are filled as needed.

It’s not always whom you know, but who knows you. Networking is NOT about you. It’s about building a relationship with people who want to connect for mutual benefit. Even when starting a career, it’s about finding out what someone else needs and helping them get it—being a resource in any way that you can.

Finding your career and getting a job in that career is a process you can’t leave to your senior year. Taking the time to create and work your plan nets the results you want.

What happens if a student receives a large scholarship and there is money left in a 529 account?

Answer: Parents worry about this possibility, but it rarely is a problem. And if it is, it’s a nice problem to have. When 529 account money is spent on non­qualified withdrawals, a 10% penalty is normally assessed and tax is owed on the earnings portion of the withdrawal. However, the 10% penalty can be avoided if the child gets a scholarship. You can take out non­ qualified withdrawals up to the amount of the tax­free scholarship. This also applies to the military academies since they are free to students.

Can you use money in a 529 college account for graduate school?

​Answer: Yes!

Who is Really Benefiting From Early Access to Federal Student Aid?

Families can now submit the Free Application for Federal Student Aid (FAFSA) three months earlier than traditionally. The move was intended to primarily help low­income families, but not surprisingly, more college­educated parents are taking advantage of the change. (RealClear Education)

Dispelling the Myth of Underemployed College Graduates

​Stories of under­ and unemployed college graduates may sell well, but they are mostly myths. File them under the heading of fake news. (Forbes)

This research material has been prepared by Horsesmouth
​
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

​The Price of College: Part 2
This month's newsletter is a continuation of last month's discussion of college prices.
As you may have learned already from one of my seminars or previous newsletters, it's important for parents to remember this simple truth:

College price tags are meaningless.

Most students do not pay full price for college. That said, paying attention to sticker prices can be extremely helpful in making college more affordable.  Here's a simple example:

Getting a $20,000 per year merit scholarship from a school that has a published price of $48,000 will obviously make a college much more affordable than receiving the same award amount from a school priced at $65,000.

• Net Price of the $48,000 School: $28,000
• Net Price of the $65,000 School: $45,000

Sorting Colleges by Price
Today, I'm excited to share with you a helpful tool that The Chronicle of Higher Education rolled out last fall that will allow you to sort through 3,000 schools by price.
With the tool, you can identify schools by price in these categories:

• Private colleges.
• Public colleges
• Two-year public colleges.
• Two-year private colleges.
• For-profit schools.

Using this tool, officially entitled Tuition and Fees, 1998-1999 Through 2016-2017, you can conduct a search for schools in any of the above categories or all of them simultaneously either nationwide or by state.

Nation's most expensive colleges and universities
Using The Chronicle's database, I generated the list below of the most expensive private colleges and universities.

​Not surprisingly, the nation's most expensive schools are nearly all elite institutions with all but one of them located on the east coast.

Using the database to find bargains
Dig a little deeper with this database and you'll find valuable pricing trends that would otherwise be hard to identify.
​
To demonstrate what you can find, I checked prices here in the state of California. Here are the most expensive private colleges and universities in California:

Contrasting with Rankings Lists
​Now if you look more closely at this list, what's fascinating is the price rankings of these colleges are correlated with the U.S. News & World Report's college rankings of best schools. The U.S. News rankings categorize by best National Universities, best National Liberal Arts colleges, and best Regional Universities (West Coast). Here are the school rankings in order of highest cost:

Looking for good buys
I'm not going to get into a discussion of college rankings here, but the reason I share the above is there has been plenty of evidence that the U.S. News' college rankings are horribly flawed. These rankings, for instance, don't measure the education that students receive at a college or university nor take into account their career outcomes.

What this little exercise suggests is that we often are paying for schools based on these rankings. There are wonderful education opportunities at many schools regardless of what U.S. News might think of a school. Here are just two examples.

Marietta College has an impressive program for petroleum engineers—the only college that offers this—that enjoys an awesome placement rate. Baldwin Wallace University, an Ohio school (its tuition is $30,776 before aid or scholarships) enjoys 100% placement for its highly regarded music therapy programs.

There are many hidden gems out there, and if you are seeking to cut the cost of college, I'd encourage you to help your students explore possibilities beyond just the most highly rated schools.

Question:
If grandparents pay off a college loan directly to the loan source, can they consider that a gift and go up and above the $14,000 annual gift tax exclusion amount for tax purposes, similar to paying the school direct for tuition?

Answer:
If a grandparent sends a payment to the lender, it is treated like a gift to the borrower for gift tax purposes unless the grandparent is a cosigner or otherwise legally obligated to repay the debt. There is no gift tax exclusion for this sort of direct payment, unlike for college tuition.

The gift tax exclusions are just for tuition paid directly to an educational institution and for medical costs paid directly to a doctor or medical facility.

The next logical question, of course, is whether the grandparent is able to claim the student loan interest deduction if the grandparent helps the student with the loan payments.

A cosigner on a private student loan may claim the Student Loan Interest Deduction on interest paid by the cosigner. Generally, to claim the deduction, a taxpayer must be legally obligated to repay the debt. A cosigner is conserved legally obligated to repay the debt.

If a taxpayer makes payments on a student loan but is not legally obligated to repay the debt, the borrower can claim the student loan interest deduction on those payments. It is treated as though the taxpayer gave the money to the borrower who made the payments.

Note that a taxpayer must not be claimed as an exception on someone else's federal income tax return to be eligible for the student loan interest deduction.

Borrowers and cosigners who file tax returns as married filing separately are not eligible for the student loan interest deduction.

See IRS Publication 970, where it says:
​
Generally, you can claim the deduction if all of the following requirements are met:

• Your filing status is any filing status except married filing separately.
• No one else is claiming an exemption for you or his or her tax return.
• You are legally obligated to pay interest on a qualified student loan.
• You paid interest on a qualified student loan.

College Enrollment Drops 1.4% as Adults Head Back to Work (Wall Street Journal)

The Wall Street Journal reports that college enrollment has dropped for the fifth year in a row for three major reasons.

• Stalled pipeline of new high school grads.
• Better job prospects for older potential workers.
• Continued retrenchment for the for-profit college sector.

College enrollment reached a peak in 2011 with 20.6 million college and graduate students. Today that number has slid to 19.01 million.

Federal Reserve Study Linking Increased Federal Loan Amounts with Higher Tuition Prices (Federal Reserve Bank of New York)
​
A recently revised study from the Federal Reserve concludes that there is a link between greater availability to federal subsidized student loans and the price of private colleges. Controlling for all other factors, the researchers estimate that for "every additional dollar of subsidized loans made available to students, institutions increased their sticker tuition about 60 cents."

This research material has been prepared by Horsesmouth.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
​
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

The Price of College
 
​What does it cost to attend college today?
 
The College Board has produced the latest sticker price for what one year in college costs today for:
 

• Public universities
• Private, non-profit universities
• Two-year public colleges
• For-profit universities

 
Here are the published prices for tuition/fees and room/board, as well as the combined costs for these institutions:

​Not surprisingly, the cost of college continues to outpace inflation, which is a trend that has held steady for decades.
 
When looking at these figures, it's important to know that 70% of students do not pay the sticker price. However, some schools are certainly more generous than others. The key is for students to strategically find and apply to schools that are not just a right fit academically and socially, but will will be financially generous given your situation as well.
 
Pricing Takeaways
 
There are a few other takeaways from the latest price figures:
 
1.The average published tuition of $33,480 that private non-profit schools charge is $8,550 (34%) higher than the average public four-year, out-of-state price.
2.Attending a public university outside a student’s state will cost an average of $15,280 more than for residents. The out-of-state premium increased by 4.3% from the previous year.
3.The estimated $16,000 average tuition/fees for full-time students enrolled in for-profit schools is about 4.5 times as high as the average price at public community colleges and 1.7 times as high as the average in-state price at public four-year institutions.
 
College Net Prices
 
The College Board pricing report also included figures on what the average net prices are after typical grants and higher-ed tax deductions are subtracted.
 
Here are net college costs:
 
In-state public universities:
Tuition/fees & room/board: $14,210
 
Private nonprofit universities:
Tuition/fees & room/board: $26,100
 
Shrinking Ability to Pay
 
The College Board’s study also contained sobering statistics on parents’ ability to afford college.
 
During the past decade, Americans’ income has not kept up with the rapidly increasing price of college. And that’s true even for parents in the top five percent of income.
The income gains, as you’ll see in the chart below, were considerably higher from 1985 to 1995 and then slowed down in the next decade and dropped considerably after that.

Trump and Higher Education
 
The higher-education world is bracing for potential changes when President Trump assumes office. However, many college administrators expect higher-ed changes won’t be as pressing as other stated issues of the new administration such as eliminating or replacing Obamacare and immigration reform.
 
It’s likely that the Trump administration will welcome private lenders back into the college loan market, which would be a reversal of the Obama administration that chased banks out of the federal student loan business in 2010. Before that time, federal loans either originated directly with the federal government or with banks.
 
Earlier this year, a Trump spokesman said Trump wants to get the government out of the college lending business.
Trump’s pick for Secretary of Education is Betsy DeVos, a conservative billionaire from Michigan. Like anyone in politics, DeVos has her share of advocates and critics. Her advocates applaud her for being pro-school-choice and championing charter schools and vouchers that would allow public dollars to be spent on private or religious K-12 schooling. On the flipside, her critics fear she will favor moving money away from regulated public schools into for-profit and private schools that may lack the same standards required of public schools.
 
WEBSITES OF THE MONTH

• Compass Education Group

This California-based test prep firm offers excellent advice on all aspects of the SAT and ACT, including which test to choose and how many times a teenager should take on of these standardized tests.
 
QUESTIONS
 
Have questions you’d like me to address in future College Focus newsletters? Please send them to michael@blomassociates.com.

New Financial Aid Changes

Chances are you had no idea October 1st, 2016 was a historic day for millions of families.

This day marked the start of significant rule changes that dictate how families apply for financial aid.

The new changes are expected to represent a big win for parents by making the financial aid process less stressful and hectic while providing parents with more time to make incredibly important decisions.

The recent changes will impact more than parents applying for need-based aid. The new rules will also have a ripple effect on higher-income families who will not qualify for need-based aid and instead will be looking for merit scholarships.

What you should know about new financial aid changes
 
Here are the key points that you need to know about the new financial aid developments:

Where you’ll see the changes
 
The financial aid changes will impact the Free Application for Federal Student Aid (FAFSA) that millions of parents fill our annually.  Completing this aid application is necessary to qualify for federal and state aid, as well as institutional financial aid at most colleges and universities.

After the federal government announced the upcoming changes last year, the College Board, which is the creator of the other main financial aid application (CSS/Financial Aid PROFILE), decided to also implement them. Roughly 230 mostly private colleges and universities use the PROFILE to determine who gets their institutional grants.

Two-­year-­old tax returns
 
One of the big changes is the requirement that parents use two-year-­old tax returns when filing for financial aid. You’ll see this change referred to as prior-­ prior year (PPY) taxes.

For new and returning students heading to college next fall (2017-­2018 school year), parents will complete their financial aid forms using 2015 tax returns. Up until now, parents have always used one-year-­old tax returns.

Families seeking aid for students enrolled in the 2018-­2019 school year will use 2016 tax returns. Students heading to school in 2019­-2020 will rely on 2017 taxes.

Two-year-old taxes are not optional.
 
Some parents may wonder if they can use their latest income tax returns instead of the older ones. This is a question that tends to come from parents who enjoyed a particularly good financial year in 2015 while income in 2016 declined.

When aiming for aid eligibility, it’s better to earn a lower income in the so-­called base year. Parents, however, can’t pick which tax return to use. The use of two-year-­old tax returns is not optional.

However, families in this circumstance can ask the financial aid officer at the school to exercise professional judgment. In an appeal the family can ask that 2015 income not be considered or that it won’t carry as much weight. Depending on the financial aid officer, there is the possibility of them obliging with the request.

Benefits of two-­year-­old tax returns
 
A major benefit of the switch to older tax returns is that the financial aid process will no longer be rushed.

Historically, the tax season and the financial aid season have uncomfortably overlapped. Parents had to wait until January 1 to file the FAFSA, but to complete it they had to finish their tax return. Taxpayers, however, usually wouldn’t have the documents they needed to file taxes quickly. Despite this reality, some state aid programs impose early deadlines—as early as mid February—and some schools give out money on a first-come, first-­served basis.

Under this time crunch, many parents were forced to use estimated tax figures so they could complete the FAFSA and PROFILE. If they estimated wrong, they ran the risk that their financial aid awards would be withdrawn or reduced.

Earlier filing opportunity
 
Here’s the other major change: parents can now file the FAFSA three months earlier than the traditional January 1 start date. The first date to file was now October 1. Parents could also file the PROFILE beginning on the same date.

Parents will be able to file for financial aid nearly a year before their child will be in college. This early start can be advantageous for families because it’s anticipated that many schools will provide students with financial aid packages sooner. Early notification will give parents and students more time to review offers and make smart decisions.

A higher-ed industry survey earlier this year reveals that 69% of college administrators said their institutions would be releasing financial aid verdicts earlier beginning with the current admission cycle or next year’s.

Families need to think about college earlier
 
As a result of the financial aid changes, the admission cycle will now be getting an earlier start. That means that families need to be even more mindful of admission and financial aid deadlines.

Ideally students should know before their senior year in high school starts what schools they intend to apply to. In reaction, many colleges are planning to reach out aggressively to teenagers in their junior year when they have previously reserved the big push for seniors.

Question:
 
How are Social Security death benefits counted in FAFSA? My sons, who are juniors in high school, currently receive income from their deceased father’s Social Security death benefits but those payments will cease when they turn 18 or graduate high school, which will be the case by the time my sons are eligible to enter college. That income will not be available so do I have to report it in this calculation (i.e. all other untaxed income)?

Answer:
 
The FAFSA and PROFILE treat Social Security income differently. The income is not included in the FAFSA and is in the PROFILE.

For the FAFSA, untaxed Social Security, either for the parents or children under 18, is NOT included on the FAFSA. For a parent, some Social Security is often taxed if the family’s adjusted gross income (AGI) is over about $40,000, but that’s only to a max of 85% of the Social Security received. The other 15% is considered untaxed Social Security and this 15% is not taxed. In general, all Social Security received by a child (or their siblings) is untaxed, as they very seldom earn over $40K in other income.

For the PROFILE, they treat it differently:

The PROFILE treats this income differently by including this instruction: Enter the untaxed Social Security benefits your parents received or expect to receive for all family members except you, the student.

The PROFILE wants to include the 15% of the parent’s Social Security income that is never taxed for federal income tax purposes, and the Social Security received for other children in the family but not the student (in case the family has multiple children receiving the federal benefit). The PROFILE realizes that students’ Social Security ends when they go to college.

The 2017­-2018 college admission season is about to start, which always attracts increased interest from parents on this critical question:
 
“How can we afford college?”
 
This month’s newsletter will focus on a few key strategies for cost-­conscious parents.
​

1. Use a net price calculator.
​
An excellent way to cut the cost of college is for your children to apply to colleges that will give them generous scholarships. Traditionally, however, parents couldn’t predict what any college was going to cost until their children received their financial aid or merit award package.
 
Applying to colleges doesn’t have to be a financial crapshoot, though, if parents use federally mandated net price calculators before allowing their teenagers to apply anywhere.
 
The purpose of a net price calculator is to provide parents with a personalized estimate of what a particular school will cost a family. When using this tool, some families will discover that a $50,000 school will be greatly discounted, but for other families the cost really will be $50,000.

​Question: Who files the Free Application for Federal Student Aid (FAFSA) if a student's parents is divorced?
 
Answer: If a student's parents are divorced, the parent who has housed the child the majority of a 12-month period will complete the FAFSA. A parent is considered the custodial parent, with the primary responsibility of completing the FAFSA, based on where the child has physically lived during a 12-month period ending on the day the FAFSA is completed. It makes no difference which parent claimed the child on a tax return or paid child support.
 
The same custody rules apply to separated couples.
 
Colleges can and do ask for copies of the divorce decree, separation agreement and child custody agreement. If the parents are going to change the child's living arrangements to live with the parent with lower income, it is a good idea to get the court documents modified to be consistent with the new arrangement.

​COLLEGE CONFIDENTIAL
 
College Confidential, undoubtedly the nation's most popular college-related website, draws roughly 300,000 visitors a month. It's a massive site that includes a great deal of information about college admission issues. The section of the site that attracts the most traffic contains the college forums. The site offers Q&A forums on such topics as admission chances, financial aid and standardized testing.
 
The site also maintains forums for families interested in individual colleges and universities. Parents and students can post questions about a school or share their impressions of a college and solicit comments from others. There are millions of comments posted on the school forums.

The new federal college loan season started on July 1, which marked the first day families could apply for a federal loan for the 2016-­2017 school year.
 
When it comes to paying for college, we believe it's imperative to minimize the amount of debt, if any at all, that your student incurs for college. After all, it is the largest expense most parents and students will ever face and how you pay for college can have massive, enduring consequences. 

However, as a practical matter, Americans are taking out student loans at unprecedented rates and you need to be informed. So long as the debt is planned for and manageable, loans can be an effective and practical way to bridge the college funding gap.

If any portion of your child's college education is likely to be paid through loans, this months newsletter will help you better understand college loan programs, as well as smart ways to repay the debt.

For the 2016-­2017 school year, the interest rate on both types of Direct Loans is 3.76%. The interest rates are adjusted annually and linked to the 10­-year U.S. Treasury note.
​
When Borrowing Limits are Higher

Students can borrow more through the Direct Loan program if their parents are turned down for the federal PLUS Loan.
 
Here are the maximum Direct Loan amounts for students whose parents are unable to obtain a PLUS Loan.
 
Freshmen: $9,500 (no more than $3,500 in subsidized loan.) Sophomores: $10,500 (no more than $4,500 in subsidized loan.) Juniors: $12,500 (no more than $5,500 in subsidized loan.) Senior: $12,500 (no more than $5,500 in subsidized loan.)
 
Maximum undergraduate borrowing when the PLUS Loan is not an option is $57,500.

The PLUS Loan was originally launched in 1980 to primarily help middle and upper­-middle class families send their children to expensive private colleges. That original mission greatly expanded over the years.
 
The federal loan for parents isn’t nearly as attractive as the Direct Loan. The interest rate for the PLUS Loan for the 2016­-2017 school year is 6.31%. And even worse, the federal government assesses a hefty 4.3% fee for all money borrowed.
 
The PLUS Loan is designed to allow parents to cover the costs that aren’t taken care of by the child’s financial aid package. The maximum amount that a parent can borrow will depend on the school’s cost of attendance minus the grants and federal student loans that the child receives. 

PLUS Loan example:
Cost of attendance: $60,000
Direct Loan: $5,500
School grant: $20,000
 
After the Direct Loan and school grant is subtracted from the cost of attendance, the child’s remaining financial need would be $34,500. A parent could borrow up to this amount ​

Question: When does a graduate have to begin repaying their student loans and what is the process?

Answer: After leaving or graduating from college, borrowers have six months to begin repaying their federal student loans. Their first step would be to identify their outstanding loans.

Borrowers can access all their federal loans by logging into the National Student Loan Data System.

It could be trickier locating any private loans that a former student has since a centralized database doesn't exist. Most private student loans should show up on the borrower's credit history, so one solution is for the borrower to obtain a free copy of his or her credit report from annualcreditreport.com.
 
Borrowers can also contact their college for this information.

​One of the strangest aspects of the college search process is upon sending their children to college, every parent believes and expects that their student(s) will graduate.
 
Unfortunately, the statistics suggest even in the best of circumstances, only 65% will graduate and it will take up to SIX YEARS to do so. It’s essential for parents to understand this reality to better prepare.
 
Nationwide Graduation Rates
Here are the nationwide graduation rates as compiled by the federal government:
 
Four­Year Graduation Rates

• Public colleges and universities: 33%
• Nonprofit private colleges and universities: 53%

 
Six-Year Graduation Rates

• Public colleges and universities: 57%

Nonprofit private colleges and universities: 65%

​Many families simply aren’t aware of the grim graduation statistics because colleges and universities are loath to divulge them.
 
Can you imagine how parents and teenagers would react if they heard during a college tour that five or even six years is a more realistic graduation goal?
 
I’ve actually seen the shock on parents’ faces first hand when I give college talks. During presentations to parents, I almost always hear a visible gasp from the audience when I reach the slide in my presentation that shows the shockingly low graduation rates of many California state universities.
 
To give you an example of what I’m talking about, here is a list of public universities in California that have the very worst four­year grad rates. No. 1 on this hall of shame list is California State University, Dominquez Hills where only 3.8% of its students graduate in four years!

​Reason for high graduation rates 
​Not surprisingly, the most elite schools, which primarily educate wealthy students, enjoy the highest four­year grad rates. The parents of the students attending these schools are much more likely to be able to pay for a bachelor’s degree and watch their children graduate in the traditional eight semesters.
 
Another explanation for high grad rates is that elite schools only accept exceptionally qualified students, who have the academic ability to earn a bachelor’s degree on time.
 
Below are the schools with the nation’s highest grad rates. The University of Notre Dame enjoys the highest four­year grad rate of any school in the country. Graduation rate (100%) refers to the four­year grad rate and Graduation rate (150%) refers to the six­year grad rate:

​Reason for lower graduation rates 
In contrast to the experience of students at elite schools, plenty of other students have to drop out of school, at least temporarily, or transfer to a cheaper institution because they can’t afford to continue. These students can be less likely than their wealthy peers to handle the rigors of college. Another huge problem for students of all income levels at less selective schools is the inability to get the classes that they need to graduate on time.
 
Schools with low grad rates would like families to believe that it’s all the students’ fault for failing to graduate, but this is largely a cop­out! Universities with students from similar demographics can have wildly different graduation outcomes.
 
What’s the explanation for this? Successful universities make it an institutional priority to increase the chances that all their students graduate on time!

What you need to know 
To reduce college costs, it’s important to identify schools that do a better job graduating their students in the traditional eight semesters. One important element to note is the four-year grad rates are based exclusively on students who start out as freshmen as full-time students. Students who begin college part-time do not impact the rates of any schools.
 
You can find significant graduation differences among schools that attract the same kind of student body and that also sport the same price tag.

Example 
Let’s look at two expensive liberal arts colleges that are both located in Amherst, MA.
 
Hampshire College has a four­year grad rate of just 55.6%. Amherst College, which attracts a freshmen class with higher academic stats, has a four­year grad rate of 89.5%. Both of these schools cost more than $65,000!
 
One reason why Hampshire’s four­year grad rate is so low for an expensive liberal arts college is because only 82% of its freshmen return. In contrast, 98% of Amherst’s students return after their first year.
 
When a significant percentage of freshmen leave a school, it hurts the institution’s grad rate since the federal graduation calculation counts those departing against a school’s overall graduation rate.

Check freshmen retention rates 
When researching schools, you obviously also need to check any school’s freshmen retention rate, which provides the percentage of students who stick around for their sophomore year.
 
In addition to being a traumatic experience, unhappy students who leave a school can make a college degree far more costly. Transfer statistics from the National Student Clearinghouse Research Center indicate that an alarming percentage of students ultimately transfer out of their original schools.
 
Among four­-year institutions, 36.5% of students who start at a public college or university end up transferring elsewhere and 34.3% of students at private nonprofit schools transfer too.

​Question: We know we will need to buy a new car within the next year or two. Is it important to incur this kind of debt before applying for financial aid so it’s reflected on the financial aid forms (and colleges know that money isn’t available to pay for college)? Or do colleges even want to know about your debt?
 
Answer: If you buy a car, you will have fewer assets in your nonretirement account. Less assets means you will have a lower Expected Family Contribution.
 
Your EFC is what you would be expected to pay, at a minimum, for one year of college. This figure is generated by the financial aid formulas after you complete the aid applications that request your income and assets. The lower the EFC, the greater the eligibility for need-based financial aid.
 
Let’s say, for instance, that you spend $30,000 to buy a new car and will have that much less in your bank account.
 
With the $30,000 gone, your EFC would drop by $1,692. Put another way, your eligibility for aid would only increase by $1,692. Depending on your circumstances and the school your child is attending (a state school vs. a private school), this aid may or may not come in the form of free money. At many state schools, there is a good chance most of this aid would simply be awarded in the form of loans.
 
I arrived at the figure above by multiplying the $30,000 in assets by 5.64%, which is the percentage the FAFSA assesses parental assets. The PROFILE assesses parent assets at no more than 5%.
 
And, as a practical matter, your EFC may not drop at all or by much less because of asset protection allowances that the Free Application for Federal Student Aid (FAFSA) and CSS/Financial Aid PROFILE use to shelter some of the nonretirement assets that parents possess.
 
Finally, if you borrowed money to buy a new car, this would not help your chances for financial aid at all. The aid formulas don’t care about your consumer debt.
 
Bottom line: Don’t spend money in your savings and checking accounts if your only motivation is to obtain more financial aid.