Breaking the Small Business Code

Comment on Direct Vs Private Loans - Misdirection is the Game

    This morning I posted a comment to an article from Inside HIgher Ed on the muted response from Financial Aid Advisors (FAA) on the proposal to eliminate private lenders from student loans and let the Federal Government be the only provider  effectively making ALL Federal Family Education Loans (FFEL) DIrect Loans. 

    The article itself is interesting but it is in the comments that we see the REAL problem with student loans!  It is a "them versus us" dialog that shows the gulf is between the colleges and the recipients!      The premise of manyof the comments is the "evil" nature of FAAs and their representative body the National Association of Student Financial Aid Advisors (NASFAA).  Following is my comment to the dialog:

   

We all know one (or more) rotten apples in any group. We also know many good people in that same group. The "good" or "rotten" actions of indivuduals is not evidence of the value or honesty of the group. It is the VALUE of the service that the group renders that counts. The service itself needs to be judged.

ERROR IN THE 2009-2010 FAFSA?

      The 2009-2010 Free Application for Federal Student Aid (FAFSA) contains could be a major problem in how parent and student assets are being defined.  The FAFSA Worksheet and the online FAFSA form both include UGMA/UTMA accounts in the definition of parent assets!  This is either an error or a complete redefining of what is to be included as a parent asset by the Department of Education.

      A UGMA/UTMA account is the way a minor owns financial assets until they are 18 or 21, depending on their state of residence. The asset is in “trust” to a guardian who is an adult responsible for managing the account for sole benefit of the child owner.  Most UGMA/UTMA accounts hold mutual funds, stocks or bonds in the child’s name and are usually managed by a parent or grandparent who gifted the original asset.

      Until this current 2009-2010 FAFSA, a UGMA/UTMA account(s) was listed on the FAFSA as athe filing student’s asset regardless of their age. The good news is redefining a UGMA/UTMA asset as belonging to a parent reduces and could even eliminate the impact of the asset for calculating the Expected Family Contribution (EFC)!  Unfortunately, the FAFSA then uses the exact same definition of an asset including UGMA/UTMAs for the student asset section of the 2009-2010 FAFSA.  This could lead to three potential errors for families filing FAFSAs:

1.  Listing the UGMA/UTMA as both a parent AND student asset thus counting the same asset twice for calculating the EFC,

Unsettling Grandparent Question on 529 Plans

   Anyone who follows my blogs and my career as a college funding advisor knows that I am not a fan of 529 Plans as a way to save for college. In my opinion, tax-free growth of your funds is not a good enough reason to use 529s when you discover all the "gotcha's" and gray areas surrounding them!

      One of the big gotcha's used to be 529 plans would impact the Financial Aid of the beneficiary. This was changed  by the 2007 College Cost Reduction Act (CCRA). The Act specifically states that qualified distributions to a student from student- and parent-owned 529s would not be included as student income on the FAFSA and would not reduce financial aid from a college to the student.  However, there is a "gray" area involving grandparent-owned 529s that was brought to my attention today.

     Financial and tax professionals often recommend 529 plans to grandparents like me as a way to move taxable assets out of an estate but still be able to maintain control over the gifted money should the beneficiary grandchildren not go to college. There are generous gifting limits and the growth would be untaxed as long as the distributions were used for qualified college expenses outlined by the IRS.  But the distributions from a grandparent-owned 529 account were NOT specifically mentioned or exempted for financial aid in the CCRA! 

      Some financial aid experts now worry that distributions from a grandparent-owned 529 are student income.  That means they must be included in the FAFSA according to the rules that clearly state  ". . . money received, or paid on your behalf (e.g. bills), not reported elsewhere on this form must be reported."  Financial aid expert Mark Kantrowitz argues that distributions are exempt regardless of ownership based on the intent of all the regulations even if it grandparents are not specifically named.  But Joe Hurley, the CPA who is considered "THE" expert on 529s, feels the situation is ambiguous. 

       So what do you do?

  There may ways to avoid financial aid impacts by changing ownership to the student or parent. HOWEVER, you MUST work with a VERY experienced college financial and/or tax planner famiiar with 529 rules. The process for gifting and changing owners between generations for 529s can be very confusing and complex.

      Grandparent-owned 529s are now firmly in the gray area and that makes me uncomfortable recommending them.  Students applying for federal financial aid face potential legal and tax consequences if they receive disributions from a grandparent-owned 529!  If a student does not include distributions on the FAFSA and it is later found they should have been counted, there could be taxes and the requirement that aid be refunded!  If a student does include the distribution and it is later found to be exempt,  they will have potentially lost financial aid including grants and scholarships for no reason!

      If you are a grandparent with a 529 Plans, meet with the advisor who sold them to you and get a written opinion on their impact on financial aid including IRS and Department of Education citations. If you do not yet have a 529 plan, discuss other tax-advantaged ways to save for college such as trusts and insurance products like cash value life insurance and annuities.

529 Plans and the Market!

The market hit extends deep into the pockets of college-bound and college families!  The market melt-down has impacted many 529 Plans!

If your 529 plan uses mutual funds, you probably took a hit.  Mutual funds are "buying clubs" that invest in stocks, bonds and real estate products.  So where these financial vehicles go (up or down) is where your mutual funds go.  And where your mutual funds go (up or down), there goes your college money.  And depending on your combination of mutual fund subaccounts - that hit could be anywhere from 1 to over 10% in losses.  Here is a printout from today for Vanguard which  I randomly selected to show you what may have happened to your 529 Plans.  Click on the page to link to the original.

Depending on who runs your 529 and what mutual funds they use, you may find yourself with much less than you had last Friday! 

I would recommend you call the financial professional who sold you the 529 Plan to see what makes up your investment and where you stand.  Discuss your options with someone knowledgeable.  BUT PLEASE DO NOT do anything rash!  There are potential tax consequences to changing or liquidating accounts.

HOWEVER, if you no longer have any gains inside your account, this may be an opportunity to move your funds to a non-529 location.  If you wanted to access your 529 for non-college reasons but were hesitating because of the tax hit, this may be a good time.  Again, discuss this with your financial advisor! 

I would also recommend you talk with an experienced COLLEGE financial professional to review all your options for college savings.  There are vehicles that are not as susceptible as mutual funds to market forces.

If you own or sell 529 Plans, let me know what you think . . .

RESOURCING - The Ugly Scholarship Truth NO ONE TELLS!

ORIGINAL DATE: 08/30/2008 11:58:19 AM

     I just got a Tweet from someone who works at a student loan company that also operates a "scholarship" site (Twitter me at LindaPTaylor).  Good news is this company is open about the connection between the two sites! Sadly, most sites are nothing but fronts for lenders or marketing companies and they don't tell the searchers who register what will happen to their registration information. (Feel free to go to www.LindaPTaylor.com and send me an eMail through my "Contact Me" page and I'll share who these good and bad guys are!)

     Bad news is the information provided by even the good guy site is NOT complete!  It has good content but neglects to share the dirty little secret of "resourcing". This is also known as "Outside Scholarship Policy" at most colleges.

The site talks about focusing on finding and applying for at least 1 scholarship a week (and recommends 1 per day - ouch). They also recommend several YouTube videos that perpetuate the tall tale that "millions" in scholarships go unclaimed every year.  They demonstrate the excitement of a student "finding" a perfect scholarship to apply for (but not winning!). But they DON'T tell you anything about this student and his potential to be resourced right out of that money at the colleges on his list!

     The key to this is to understand you are not supposed to receive more money than you "need" for college.  Most college-bound families know the equation COA - EFC = need which determines how much aid a student needs for a college.  The REAL equation is COA - EFC - OUTSIDE RESOURCES = aid!

     So after you know that your scholarships will be absorbed by this equation, the next question is what part of the aid package the college will apply the scholarship to! UPenn promises it applies to loans and work-study first.  Others, apply it first to federal and state grants. But the nasty ones apply it to their free money.

     I met with a family last night who will be needy at every school on their senior son's list. I showed them the probable structure of financial aid at these schools including loans and free money but noted that regardless of the school their son finally chooses, they will end up paying at least their EFC of $14,000. So the talk immediately turned to finding scholarships for that $14,000.  I then explained the practice of resourcing at the schools.

     I showed the family 2008-2009 financial aid offers I had from several schools including Stanford, Columbia and Northwestern that clearly show the outside scholarships were "absorbed" or resourced by these colleges leaving the family's EFC totally intact. So for needy students at most colleges, outside scholarships don't do ANYTHING to help pay the family's direct costs!

     I explained that most scholarships are co-addressed and the colleges have policies to absorb or resource all such scholarships.  So in the case of a needy family, finding outside scholarships is usually a waste of time!!!!!!!!!!!!!!!!!  Unless you are receiving no free money at all from a college, scholarships are not the salvation most families have been led to believe.

      When I think of all the time wasted by hard-working families trying to find scholarships, registering at sites that sell their information to lenders or other marketers, and knowing what happens to them emotionally when they have the money snatched out of their hands --- I could scream!

       The RIGHT way to pay for college is to learn to play the game THE RIGHT WAY!  Learn to fnd scholarships the SMART way.  Don't buy into these myths and half-truths.  Find a source you can trust like the College Leadership Foundation.    

       I feel so strongly about this whole SCHOLARSHIP RESOURCING issue that I am GIVING AWAY by complete Insider Secrets to finding scholarships (worth $149) when a family joins the nonprofit Foundation's ecoaching program! You get everything I have including the eBook, video of the 1-hour workshop, PowerPoints, and bonus materials.  I make NOTHING from the sale because I have had it with meeting with families who had thousands of scholarship dollars snatched from their pockets by resourcing!

   

If you have been "RESOURCED", PLEASE let me know! I want to share real life stories with other scholarship seekers.

What is a College REALLY For?

ORIGINAL DATE: 07/01/2008 09:00:35 AM

I just posted a comment to a very revealing article at Inside Higher Education: http://www.insidehighered.com/news/2008/07/01/fish
I would recommend you read the article and then the comments.  It is a great microcosm of the debate over what and who is college really for!

The problem as I see it is the college "system" is all things to all people which means it will ALWAYS be perceived differently by each viewing group.

Because "college" is so large and so broad, college will always be viewed through these differing perceptions which means they will often NOT agree with each other.  So the question is, who is the FINAL judge?

• Is it the teachers who want to preserve or create a particular environment?  Many see them selves as "protectors" of a legacy of independent thought not to be bent by administration or legislation.
• Is it the tax-paying community that supports the colleges to educate their children into becoming successful citizens?   The state colleges and universities get my tax dollars directly.  But even a private college that takes federal dollars is using my money!
• Is it the student who is exposed to experiences and opinions beyond their current family values? Are they a client or a blank page to be written on by the college "system".  What happens if the college wants to write something the community or the family does not want?
• Is it the individual tuition-paying family that goes into massive debt for a "good education" and gets student with no marketable skills?  Is there a duty for the college to provide value?  How much responsibility for a failure lies with the college or the student or both?

Now add to the above issues the question of who is serving who inside that system!

• The teachers clearly feel they serve a "higher" cause and the end user - the student - is best served by conforming that student to their teaching
• Administrators are company "presidents" beholding to the "stockholders" called alumni, marketing to new "stockholders" called students and trying to keep the production line "teachers" happy while trying to generate income from all sources to keep the "company" going.
• And at the end of the pipeline is the consumer parent/student who is being asked to pay 20-25% of their income (via the Expected Family Contribution calculation) or more (!) for the privilege of having their student taught what the faculty feel is important and not necessarily connected to what the paying "customer" wants for their money.

I have NEVER been in an industry where what the customer wants is so neglected.  But I have never been in an industry where the client has been so confused by the system.  The problem is not politics per se.  It is the disconnect between the wants and needs of the providers, administrators and ultimate customers.  There is little to no overlap between them! Is there a way to fix it?  My opinion is transparency. The colleges need to be transparent in their philosophy.  If they believe in exposing the student to a wide range of controversial positions, then it is up to the consumer to decide if that is for them.  If the professor wants to share his political views, that should be known to the end customer - the student.  Then that customer has the right to go "somewhere else" and find a teacher or university more to their taste.  I know what aggravates my client families is not KNOWING what they get for the money. My 2 cents . . .