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:
What’s Wrong With High School Counselors?
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.
Ann
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:
Dubious Financial Advice: Hiding Home Equity
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:
Will Saving for College Hurt Your Chances for Financial Aid?
Bottom Line:
The best way to shrink your college costs is to become an empowered consumer by educating yourself. And stay away from snake oil salesmen!
Wow, nice broad-brushing of the college financial planning! Perhaps the family that was offered the $200k life policy had no other money to fund college and was going to need to rely on loans. Perhaps “hiding home equity” was not the goal at all. If loans are necessary, the question becomes “which loan option is best?”
After Stafford loans are taken (“financial aid”), the options are (a) PLUS loans – 7.9% interest plus 2.5 points – and (b) private loans (variable-rate, 20-25% annual caps if there are caps at all; smart when rates are at all-time lows?). 401-k loans require repayment within 5 years or 90 days after separation of service and are repaid using after-tax dollars. Might a 3.5% FIXED, cash-out refinance make sense in this case, a new “college mortgage” that can be pre-paid and accelerated? Of course. Assuming the 3.5%, no-points home loan is right, the next question becomes, “Where do we put the cash-out proceeds?”
Put them in a checking account and they are now – in your example – a $200k financial aid parent “asset” that reduces aid eligibility by $12,000 annually. Put the proceeds – which, after all are not an actual asset (just a ridiculous financial aid one) but are a liability – into a cash value life policy and they are invisible to the aid formulas. Given that the $200k is a LOAN, shouldn’t it not be counted as an ASSET?
The life policy insures that the unintended consequence of borrowing wisely for college – creating an asset under the stupid financial aid rules – does not hurt the family. Assuming the motive for the recommendation was not to “hide assets” but was instead to borrow money, this is a great strategy. Unless a 3.5% loan is not actually better than a 7.9% one; unless a fixed-rate loan is not better than a variable-rate loan; and unless you’ve got a better way to borrow $200k for three kids’ colleges, Lynn…
Both your post and this article makes sense to me. My mortgage is close to being paid off and I have been advised to take out a 30 year mortgage (I’m 51) and make a single payment, buying a whole life policy from Mass Mutual. I would like to know if anyone can tell me the specifics of this deal. Have run into a few sites scaring me away but my advisor said basically whay Sanjy did.
I am quickly hunting up a second opinion.
Lynn, your post today really struck home with me. My husband died when our children were 3, 5, 8 and 10. I was fortunate that there were insurance proceeds that were set aside in a trust to be used exclusively for the children’s college educations. I sought recommendations from friends and ultimately became a client of a Certified Financial Planner (CFP). I told him that the money would not be used for anything but college.
So, what did I end up with for investments? Two tiered fixed annuities (with me as the annuitant; I was in my early 40’s), a real estate limited partnership, life insurance policies of $250K for EACH child, and a few mutual funds that had back end loads.
When I woke up from the haze about a year later, I realized that these were terrible investments given the purpose of the trust. I filed a civil lawsuit, filed a complaint with my state’s Division of Insurance, and filed a complaint with the CFP Board. I alleged that these investments were unsuitable given the intended purpose of the money, my age and my investing background (which was nil). I wrote the CFP complaint myself! I may not be a financial wizard but I’m no shrinking violet.
I was fortunate that the end result was positive for me. I got ALL my invested money back plus a settlement amount. His CFP license was suspended. He appealed, the Board reviewed the case and then DOUBLED the suspension time.
I was very lucky but I could have avoided all the stress if I’d had someone like you to advise me, Lynn.
Wow Paula. That’s a horrific story. You are so lucky that you got all your money back. That is extremely rare!
Thanks for sharing this cautionary tale!
Lynn O’Shaughnessy
Good point. We were hit with that idea by a ‘friend’ too.
We had no money saved toward college but two decent incomes so when our first got to college age, he stayed home for first two years and went to a local university. He also worked 20 hours a week. Always has had a job.
He’s now about to graduate with a degree in finance from a major public university. Not one dime of debt. And some good personal finance habit ingrained!
As a family we told all three of our children about our situation and that they will simply not go in debt. (We have no consumer debt, auto loans, just a mortgage) and so this was no shock to them.
Now with two in college and one starting in 15 months, all of them know they will work, stay at home or get a little bit of monthly ‘family scholarship’ if they move out. While their friends don’t work, meander through their time and party on credit cards and parents gifts, ours will all work part-time and pay cash the whole way through.
College can be done without debt. Most parents are too dense to consider a challenging option and fall for the lie that their babies have to have the best and we can pay for it later. Ridiculous and foolish.
I’ll put those under challenged grads up against my hard-working adult children with a 4 year work record any day. We’ll see who gets a job.