College Financial Aid and Admissions

Hi I’m Carl Shalshaw and welcome to e-prep. I’ve spent the last couple of months videotaping myself giving advice on how to take the SAT. But I know that getting a good SAT score is not all you need to do to get into a good college. There’s a lot you need to know about financial aid and admissions. And while I’m not an expert of those fields I have some friends who are. And I recently had the opportunity to set down and talk to Don Betterton.

Don is a former financial aid director of Princeton University. He was there for 30 years in that position. And I got to know Don back in the late ‘80s when he one of the assistant soccer coaches and I was on the varsity soccer team. And so Don and I have known each other for a long time. He’s a great guy. And I ask him what I could do today or for my kids even in high school to help make paying cut for college easier when my kids finally do go to college .So I grab my video camera and sat down with Don and hopefully enjoy the conversation.

(Carl) So Don I’m excited I’m about to learn the 12 things I need to know about saving for college my children. Your first goal it is called putting aside money for college is a good idea, the earlier the better. My question for you would be, “Who is it a good idea for, me or my children?” (Don) Actually it’s a good idea for both. What I’d like to do is compare savings versus borrowing. Because if you don’t save now, the chances are your child’s going to have to borrow later on. So I have an example here. How old are your children?”

(Carl) I have a 9 year old, seven year old and a six year old. (Don) “Okay, my example is based on a five year old so let’s start with that. Thirteen years until college, you start putting aside money when your son is five years old. You put aside $2,000 per year over that 13 year period. You set aside $26,000 dollars. The interest accumulation of that period time will mean you’ll have $40,000 ready go to college when he’s 18 years old. Let say, you don’t do that. You don’t put aside any money at all, you still need $40,000. Now you have to borrow that money. He takes out a student loan, graduates with $40,000 worth of indebtedness. He has to repay that at 6.8% interest rate over ten-year period. Guess how much you’ll have to repay?

(Carl) “Ah, $55,200” (Don) I think you’ve been looking on that sheet. Anyway, so that’s a good point. And once with the savings you put aside $26,000 for the $40,000 borrowing. He borrows the same $40, has to repay $55. So it’s almost a $30,000 difference in this example between savings and borrowing.

(Carl) I agree with you. I think that if you know do the numbers it works out a hundred sixty-seven dollars a month for me right now. And I think that if you start putting away that amount of money, you just get used to it. You’ll learn to live without it. And before you know you’ll have this nest egg. It’s ready for the children in their college education. And so just a recap, your point number two was savings bet borrowing heads down. I agree with you a hundred percent. Can you explain for me point number three which is the tax system gives incentives to college savers? What does that mean?

(Don) Yeah it sure does. There’s something called the 529 plan which the government set up and that’s a provisional internal revenue services that you don’t have to pay taxes on money put on those particular college savings plan. Not only you do not have to pay federal taxes but you don’t have to pay state taxes. So what it means is, this money accumulates without any tax payments over those 13-year period we talked about. A substantial difference if you accumulate money paying taxes every year versus not paying taxes, example I like to use would be if you set aside at age zero when your child is born $18,000, a one time payment you put aside, if you’re to pay taxes on that over a period of 18 years, you’ve accumulated $43,000. If you do it in a 529 plan, than that, you’ll actually $63,000. So it’s quite a difference in your pocket, your pocket expense in savings in any way that’s taxable versus the 529 plans which are not taxable, either in the federal or state level.

(Carl) Really where it comes down to is there’s a $20,000 difference in your example that would go to me and my child’s education versus… (Don) Right, it’s a government subsidy for saving for college basically.

(Carl) Okay, your point number four is 529 plans are the most popular and convenient way to save. What are 529 plans? (Don) 529 plans are these government sponsored savings plan which are now by far the most popular way to save for college. Think there is a hundred billion dollars on these plans as of the current time. And they simply are I think the most convenient and easy way to save for college.

(Carl) Now, you say government plans, are they federal or state plans for the most part? (Don) The federal government puts in the rules as far as these tax events that we talked about. But the action is the plans are set up within each state, they establish their own. And so when they look at 529 plan, you always starting looking at your state plan. Because there’s certain advances as far as state tax deductions and some scholarship benefits, whatever. But there’s also a very good website called savingforcollege.com, all one word, savingforcollege and then .com. and I think it’s worthwhile before one invest in this one-zone state plan to at least go on that website and check some of the provision of other state plans to see whether your state’s offering the best deal for you or you might even do better by going to another state.

(Carl) Okay which you just answer your point five which is not all 529 plan are . You should shop around and the website was collegesaving, (Don) savingforcollege.com.

(Carl) Sorry for that, savingforcollege.com. Number six, what if beneficiary doesn’t go to college or gets a full scholarship. Now you know all of my children, being at full rise, it’s a complete race of time for me, but let’s just pretend . (Don) Okay, okay. If you can’t use any of your children, do you have any nephew or nieces I guess as my question…. (Carl) I do, I do. Both of my sisters have kids so I have two nieces and three nephews. (Don) Okay, well, the way they set up the rules is you establish a beneficiary. If he or she does not go to college, has a scholarship, whatever, you can then move the money around to other beneficiaries including your whole family, cousins, first cousins. If you want to go back to school you can use it yourself. You can actually skip a generation and even go to your grandchildren but we won’t get into that right now.

(Carl) Well, speaking of different generations, my parents are at times expressed an interest in helping me save for my children’s education. Is it first of all typical for grandparents to want to get involved, and if they want to, can they get involve? I read a ratio poll that said 2/3 of grandparents would like to help their grandchildren with college to some extent. 529 plans are excellent option for grandparents. We haven’t talk about the effect of financial aid formula on this savings yet but there’s kind of a light tax on savings that will be held in the parents’ name if the grandparents save the money for college. They’re not part of the financial aid system at all so one doesn’t have even to worry about that. The other advantage of grandparents is that as they build up their estate, and they even though they’re the owner on their estate. So it’s actually a good estate planning technique as well. And further down the line I hope their grandchildren which I’m sure they will really like to do. Okay we’re talking a little bit before about you know, what is the right amount to save? Now you throw out some example of a hundred and sixty seven dollars a month and I ask you this question: What if I can’t save that much what should I do? And the other variable is I don’t know how expensive schools are going to be.

Right. Right. Right. Is there a sort of right amount to save? How do you go about figuring out what the right amount?

Yes, the easiest answer to that is simply save what you can afford it take care as we talk about your current living expenses, your retirement or protection or whatever. If one is to set a target figure reason is the how to stay public institution is. In New Jersey for example for student that comes from other state is about $17,000 a year currently. And if you take that and you pay over a period of the time that ends up being 13 years using the same five year old example, a hundred and sixty eight thousand dollars you’re facing way down the line and you have to put aside about $450 a month to meet a target like that over a period of time so some families cannot afford. If you can afford that it’s a very good number for you. If your student stays in the state then that amount of money, tuition plus room plus board. If private institution can be expensive.

Don one last question, on the topic that I’ve really didn’t cover in the last segment, that is “will I ultimately be penalize if I who saves and does everything I’m suppose when I get to that financial aid or that when my kids go to school.

Yeah, that’s a really good question and I heard that quite a bit “am I penalized for saving?” whether in a 529 plan or any other form of savings on how they treat savings which let me give you an example. If by the time your son gets a college you have a hundred thousand dollars in some form in other savings in 529 plans. The financial aid formula first said you can reserve $50,000 and $100,000 and what is called the tax rate on that the amount is added to your contribution is 5%. So going through the math, 5% of $50,000 is $2,500. so your contribution is now going to be $2,500 greater because you have a hundred thousand dollars. So I think tha’s really light treatments on savings. As a matter of fact that a hundred thousand gains some interest throughout the year the chances are you can simply pay some of the interest off the top of it that never actually the principal of. So whether it’s a 529 plan or any other form of saving.

Awesome. Thanks for really appreciate your knowledge and your willingness for sharing it with me. Thank you.