Author Archives: Madeline Wolberg

Paying For College

The Problem.  Paying for the education is one of the largest financial outlays that most families face.  I went to Washington & Lee for undergraduate and law school in the 1960s for $2,000 a year.  The sticker price is now over $60,000 a year.  The cost has gone up 30-fold in 50 years.  According to the College Board, the average cost of attending a state university is $25,000 for a resident and the average private college cost is approximately $49,000.  These costs increase at approximately 3% per year.  What the College Board and the colleges do not talk about is that the cost needs to be grossed up for the state and federal income taxes that need to be paid on earned income that is used to pay for tuition.  For example, if you need to pay $50,000 a year for 4 years of college, the payments going to the college total $200,000; but if you are in a 40% tax bracket, you need to divide $200,000 by 0.6 to get to the cash flow of $333,333 that will be required.  It gets worse if we need to factor in interest on long term loans.

The Princeton Review in Paying for College describes making the grades and building the resume required for acceptance into prestige schools as a “savage puberty right”.  An article in the 04/09/2018 edition of Time reports a 30% increase in the number of students visiting school counseling centers between 2009 and 2015, that in the previous 12 months 39% of students report being so depressed that it was hard for them to function, that 61% had felt overwhelming anxiety, and 12% seriously considered suicide.  We understand that education is the key to success in our world and they are motivated to spend to get it for their children. But we need to do the best for our children without bankrupting ourselves.

There is a lot of uncertainty in the planning process.  Income in future years is uncertain.  At 16 students don’t know much about what they want to do for the rest of their life, where they want to go to college or about where they will be admitted as they finish high school. The target moves.  Planning needs to be flexible.

Sources of Funding.  Funding sources include family, scholarships, and loans.

Adversarial Relationship. Schools are run by faculty and administration for their financial benefit. The mission of their financial aid officers (FAOs) is to minimize the portion of the sticker price that is absorbed by the school and to maximize the amount paid by the families.  The family objective is to maximize scholarships and to avoid loans.

Negotiating with a FAO is like buying a car.  We start with a “sticker” price.  This is what the school dreams about getting.  And there is a net price, which is what the parties agree to at the conclusion of their negotiation.  There is a wide range of net prices. The financial aid publication of one elite prep school shows a sticker price of $45,300 but average family contributions of:

Family Gross Income

Over $180,000

$100–$140,000

Average Family Contribution

$26,738

$13,400

There are big discounts from the sticker price. There is strength in financial weakness: a well-endowed school can give full rides to financially poor students with attractive records.

The Problem with Student Loans.  In 2016 there was in the U.S. $1.5 trillion in outstanding student loan debt.  That is up from $500 billion 8 years earlier.  The average undergraduate leaves school with $35,000 owed in loans.  Of 2005 graduates, 63% were delinquent by 2010.  The total number of delinquent borrowers in 2016 was 8.1 million and that number continues to grow.  And these figures understate the problem because they do not reflect family loans.  The schools do little, if anything, to control their costs.  The Department of Education makes profits on its lending operations and stands with the lenders and their lobbyists to maintain the status quo.  While the government may make or guarantee student loans they farm the administration and collection of the loans to private companies.  The legal environment favors the lenders; discharged in bankruptcy is very difficult.  Student loans are a mortgage on the student’s future; they should be used only as a last resort.

The Application Process.  The application process is complicated.  In addition to the underlying applications for admission to the schools there are two different methods that are used to evaluate eligibility for financial aid.  There is the federal convention that starts with the completion of the FAFSA (Free Application for Federal Student Aid) and there is the institutional format used by most private schools with their own forms.  The private schools pay greater attention to assets than does the FAFSA.  Both approaches are tied to income tax returns.  Starting early is important: scholarship funding is limited and late applicants may miss out.

The financial aid application is not something that just needs to be done once:  the forms need to be completed the aid package negotiated for each year in which financial is needed.  The process is complicated, but the time and money invested can pay for itself many times over if it results in the right package.

Cost Control.  We can control costs by selecting appropriate schools, maximizing scholarships and minimizing loans.

Our Services.  We serve as general counsel to the family to bring them together in this important planning process.  Our goals are to:

  • Define costs and resources
  • Work with the family and guidance counselors to select appropriate schools
  • Calculate expected family contributions
  • Review tax returns and financial statements to find tax favored means of payment
  • Explore extended family resources and engage extended family members
  • Develop a comprehensive plan to maximize financial aid and minimize loans

We work for a fixed fee.

And we can work on the problems that arise in the servicing of the loans.