College financial aid: estimating how much

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How many times have you mentioned a college to someone and gotten the response, “Oh my gosh, Prestige University is SO expensive—how are you ever going to afford it?” Too many families decide not to apply at all when they see a sticker price of $58,000. Wrong!

The first number you need to pay attention to is not tuition cost, but cost of attendance (which can be found on the college’s website). This includes not only tuition, but also books, fees, room and board, which can all jack up the price considerably (but remember, you won’t be feeding the child for the school year, which in the case of some teens can be a substantial cost savings in itself). Okay, now you’ve picked yourself off the floor. Just for entertainment, pick one Prestige U. that your child probably isn’t going to get into, and find the cost of attendance at your State U. State U is going to be cheaper, but probably only because of in-state tuition.

For example, at an anonymous but real Prestige U. this year’s (2011-2012) cost of attendance is $58,955, of which $41,853 is tuition. At the University of Illinois, in-state cost of attendance is $28,204, with $11,104 of that going to tuition. Now, at “sticker price”, where do you think you might get a higher dollar amount of aid? Probably, Prestige U. What’s important to consider is not the sticker price, but the actual OUT OF POCKET cost. The out of pocket cost is the sticker price minus the amount of aid offered.

Here’s the big mystery: how much will that aid be? Future blog posts will discuss the factors that affect aid at private universities, but for now I’m going to offer a quick and dirty way to get a wildly inaccurate (but useful) estimate of what the parental unit will be expected to kick in for junior, otherwise known as the Expected Family Contribution (EFC). Take the total cost of attending, subtract your EFC, and voilá, that’s what you have a chance at getting (although there are a lot of ifs and buts on that).

However, since too many parents do conclude right away that they won’t be eligible, and just what the EFC might be is always shrouded either in mystery or in 95 pages of paperwork more complicated than your tax return, I’m going to give you this wildly INACCURATE method that takes into account none of the adjustments or strategies that a college financial aid planner (ME!) would suggest. But it’ll get you started. Here goes:

1. Add up your assets. Don’t include your IRAs, Roths, 401(k)s or any other retirement funds. Also don’t include the value of your primary home (but do include vacation homes or investment property). Multiply this total by .0565.

2. Next, grab your tax return and look at the number on line 22 of your 1040 (not line 37 as you won’t get deductions from college financial aid for many of these items). I’m going to presume this number is over $30,000. Take 47% of the amount over $29,300 and add $7926 to that sum.

3. Add together the answers you got in #1 & #2. That is a gross, inaccurate estimate of your EFC, but it does give you a starting point to think with.

So, let’s take a look at how this might work in two situations. Family number one—parental combined income is $100,000, and they have a stock and bond portfolio of $100,000, and $500,000 in an IRA but who cares because that’s not going to be considered. So, under my seat of the pants formula, their EFC would be $41,155 from income and $5,650 from assets totaling $46,805 (PER YEAR). Probably aren’t going to get any money from State U. as their EFC exceeds the cost of attendance and according to the formula, they can pay for it. However, they’re $12,150 short at Prestige U, so it’s definitely worth an aid application.

Now let’s look at another family. Recently divorced single mom is trying to get her career restarted, but with “unallocated maintenance”, her income is $50,000. However, the property settlement also gave her $500,000 in assets (again, not including the house or retirement accounts). Under my “bad” estimator, she’d be nicked for $17,655 out of income, and $28,250 from assets for a total EFC of $45,905. She’s going to feel pretty stressed when she sees that figure, but it still puts her in the ballpark for aid at Prestige U.

Of course, every situation is different, THERE ARE LOTS OF WAYS TO ADJUST THESE FIGURES, Prestige U may use a different methodology called the institutional method (my “estimator” is based on the federal formula) and don’t rely on this—enough caveats? Nevertheless, it does give you some idea of how even relatively affluent families might be eligible for financial aid. Don’t give up, and give me a call to take a look at your individual situation!

Financial planning & Suzie Orman

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At a recent financial planners’ conference, the speaker asked the crowd, “How many people think Suzie Orman is an expert?” and nary a hand went up. Then she asked, “How many of you are making as much as Suzie Orman?” Again, no hands. Therein lies a lesson for anyone running a business.

Suzie is no idiot. I admire her for her ability to make complex financial topics simple (sometimes too simple) and I completely agree with her message to align your finances and your spending with your true aims in life. She’s brought these issues in front of many people who are deeply troubled by the consequences of their bad choices and are seeking a way to change their path and achieve their dreams. That’s what financial planning is all about. Sometimes Suzie is a little off the mark, and doesn’t quite get her facts correct. That’s why an individual financial planner that knows your particular situation and stays up on the latest in the industry can be more valuable than a television personality.

However, Suzie’s value to the small business owner is more in her technique than her advice. That is, don’t be afraid to trumpet your message. If you know something about your field, don’t be afraid to tell people that you know—your education and experience DOES make you an expert. Your customers and clients are looking for authoritative answers, and you are the one to give it to them.

Charitable giving: It’s hard to do good

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I feel ripped off, but in retrospect I saw it coming. My daughter and I had been gifted with the audio recording of Three Cups of Tea by a friend who had been inspired by Greg Mortenson and his tale of working to develop the Central Asia Institute, to bring education to the children of Pakistan and Afghanistan. It particularly touched our hearts because he focused on the most underserved—girls in these societies.

But, even when tears rolled down our cheeks, I heard a little voice inside me. Having worked in social services for a number of years, I’m always a little wary of selfless heroes with passionate obsessions. I’ve sometimes found, in the words of an old musical, that they care more about the bleeding crowd than about a needy friend. A person who appears to be immune to the creature comforts and needs that most of us have can also have an ego immune to criticism or input, and little sensitivity or tolerance for others’ human foibles. Also, such leaders (in my experience) give little attention to the daily requirements of running a responsible organization. Actually, Mr. Mortenson didn’t seem particularly sensitive, even in the book, to the needs of the women in his own life, and this nagged at me.

In my days in Washington I saw plenty of charismatic leaders who played fast and loose with the bookkeeping, not for personal profit, but because they had no training in accounting and because they were far too busy trying to promote and do good and there are only so many hours in a day. The best of them realized they couldn’t do everything and hired staff that could pick up those tasks. But with celebrity, often the money comes in so fast that there’s no time to get organized. Once, an organization in which I was working was featured in Parade magazine. We got thousands of dollars in donations from people who thought we would put them to use for children. Unfortunately, we were really an umbrella organization for local groups—essentially their advocacy group in D.C. And we had no staff to answer the thousands of letters. We detailed one already-very-busy person to it, but by the time he wrote all those letters, the donations about equaled his salary for the time. Really, none of the sincere donations did any good whatsoever.

So, what’s the point here—don’t give money to charity? Well, as the old newsman’s saying goes, if your mother tells you something, check it out. The problem here is that I DID check it out. The Central Asia Institute got a stellar rating from Charity Navigator, Mortenson’s salary was reasonable, and everything looked good. In fact, a respected journalist, Jon Krakauer, had donated a respectable chunk of change to CAI also. And he’s plenty mad about it, too. It’s also still important to remember that all the facts are not yet in, but really, it doesn’t look good and I’m sure I’m not the only one who’s thinking maybe there are other places to put money. The point is, no matter what investment you make (and charity is an investment), there’s always risk. You check it out the best you can, think about why you’re investing, and recognize that in some (hopefully few) instances, it’s not going to work out as well as you’d hoped. But you have to keep trying.