April 29, 2024 – What are the most important things to consider when planning for college and what are the various ways to do so? In today's Lifetime Planning episode of the Financial Sense Newshour, Jim Puplava speaks with Mark Kantrowitz, a nationally-recognized expert on student financial aid, scholarships, student loans, and more. Mark discusses the tax advantages of 529 savings plans, the use of a 5-year gift called Super Funding, differences between public and private colleges in terms of costs (and some hidden surprises), when to sign up for scholarships, how income variability can impact eligibility for financial aid, major bugs this year with FAFSA, Biden's student loan forgiveness program and who's affected, and much, much more.
Websites and resources:
- Mark Kantrowitz | The College Investor
- Mark Kantrowitz (@mkant) / X (twitter.com)
- Guide to 529 Plans, Saving for College and Financial Aid
- Private Student Loans Guru
Transcript:
Jim Puplava:
Well, it is that time of the year. It's graduation. You will have seniors graduating from college and high school. But for those graduating from high school, what about the cost of college? And that's the topic of today's show.
Jim Puplava:
Joining me on the program is Mark Kantrowitz. He's a college planning expert, writer at the college investor, and he's written for just about every major newspaper and magazine in the country. So, Mark, we've seen the cost of college. I think you probably know this better than I do, but I think college costs have been going up between six and 8% a year. So let's begin with that and talk about ways that could take some of that burden away for parents with getting scholarships or funding or various things that can help a parent put their kid through school.
Mark Kantrowitz:
Well, the first thing they should do if the child's younger is start saving for college, preferably in something like a 529 college savings plan. If you start saving from birth, about a third of your college savings goal will come from the earnings. If you wait until your child enters high school, about 10% will come from the earnings. But there's also about two thirds of the state have state income tax breaks on your contributions to the state's 529 plan. So it's a tax advantage and financial aid advantage way of saving for college.
Mark Kantrowitz:
But if your child's older, and they are going to need to apply for financial aid by filing the FAFSA form, which unfortunately, this year has had a bungled rollout of a new simplified FAFSA form, many students have not yet received their financial aid offers, and the colleges are pushing back their deadlines to accept an offer admission because of this. So the key is to just keep on trying to get your form submitted and then processed, and then if there's anything unusual in your family's financial circumstances, you should appeal for more financial aid. But overall, the watch word is to be patient this year because it's been an extremely stressful event for all parents. So you're not the only parent who's struggling to get the FAFSA form submitted.
Jim Puplava:
I want to go back to the 529 plan you mentioned. You know, a lot of grandparents, their kids have their first child. One of the greatest gifts that you can give to your kids is starting a 529 plan or making some kind of gift at birth and start off on the right foot there.
Mark Kantrowitz:
Yeah. And it's gotten even better this year because with the 24 25 FAFSA money in a grandparent 529 plan, as always, doesn't count against aid eligibility. But for the first time, if you take a distribution from a grandparent owned 529 plan to pay for the child's college expenses, it has no impact on aid eligibility. Even the distributions no longer have an impact. And something else that grandparents may want to be aware of is something called five year gift tax averaging, which is also known as superfunding, where you can give five times the normal annual limit in a lump sum, and it will be treated as though we're given over a five year period.
Mark Kantrowitz:
So the annual gift tax exclusion is what, 18,000 this year? And grandma and grandpa can give twice that as a couple, and then you can give five times that as a lump sum contribution to cover this year plus the next four years. So you can give a substantial amount of money to get the 529 plan started.
Jim Puplava:
Yeah, because if you take grandma and grandpa giving, that's 36,000 times five, mark, that's 180 grand. I mean, that's at least two years at Harvard.
Mark Kantrowitz:
Yeah. And if you start sooner, the money will grow due to appreciation over the next 17 years. And keep in mind that college costs go up by about a factor of three over any 17 year period. So this is a way to get your grandchildren's ability to pay for college started on a very good footing.
Jim Puplava:
So let's talk about, recently President Biden has come out, talked about college loan forgiveness. Can you speak to that? Who would qualify and who does this apply to?
Mark Kantrowitz:
So first thing we need to recognize is that President Biden has forgiven more student loans than any previous president using existing student loan forgiveness programs. Now, he is trying to create essentially a new student loan forgiveness program. And his first attempt was blocked by the US Supreme Court that involved the Heroes act of 2003. Now, he's trying to use the waiver authority that's in the Higher Education act of 1965 to essentially create a new loan forgiveness program. Due to the nature of that waiver authority, it has to be targeted at borrowers who are struggling financially.
Mark Kantrowitz:
And so the proposed regulations include nine proposed waivers that are sort of focused on that. And it's a very expansive reading of his authority. It may eventually get blocked by the US Supreme Court, again, for the exact same reasons, just because the individual proposals are more targeted than the original attempt. The combination covers almost two thirds of all existing borrowers. Now, this is a one time event if it does succeed.
Mark Kantrowitz:
So it's not something that students who are going to be enrolling in college this fall will get to benefit from. But there is a new repayment plan. There are four existing income driven repayment, income contingent repayment or ICR income based repayment or IBR pay as your earned repayment or pay and revise pay as your earned repayment or repay. The repay plan is being replaced with a new saving on a valuable education or save plan that is much more generous and provides opportunities to get loan forgiveness sooner. So with these existing income driven repayment plans, the remaining debt is forgiven after 20 or 25 years of payments.
Mark Kantrowitz:
The payments are based on the borrower's income as opposed to the amount they owe now that 20 or 25 years and waiting for two decades for forgiveness and essentially having to be in living below a low multiple of the property line for that long in the new safe plan is 225% of the poverty line. That's still a long period of time, but with the new save plan, you can get forgiveness sooner if you started off with less debt. So if you started off with $12,000 or less. In federal student loan debt, the forgiveness occurs after ten years of payments instead of 20 or 25 years of payments. And each additional thousand dollars of debt adds a year.
Mark Kantrowitz:
So $14,000, which is 2000 more than 12,000, would have forgiveness occurring after twelve years in repayment instead of ten or 20 or 25 years. So he's already started forgiving those loans. There is a lawsuit from republican governors or district attorneys of several states' attorney generals, I meant, and that lawsuit is pending, but I don't think it's going to be successful because the Biden administration followed the normal procedure for establishing new regulations. And this isn't a theoretical exercise. This legislative authority to issue regulations has been used twice before to create the pay and repay plans.
Mark Kantrowitz:
So the fact that it's more generous, I don't think derails the new regulations. So the safe plan, which goes into full effect on July 1, it's already, parts of it have been placed in effect sooner. I think it's going to survive those lawsuits.
Jim Puplava:
So let's talk about financial aid and then also to the type of colleges. So let's say I'm a parent, I've got three kids, I want them all to go to college. Well, obviously at what, $90,000 a year at Harvard? That's going to be rather difficult unless I'm Larry. Lots of bucks.
Jim Puplava:
So what about, you know, maybe not going to Harvard, but let's say a state university and then applying for financial aid so it becomes more affordable. Let's talk about that.
Mark Kantrowitz:
So an in state public college is usually going to be your least expensive option. They can cost a third to half that of a private four year college. Now, Harvard happens to be among the more generous private colleges, so they have a no loans financial aid policy that replaces loans with grants in that financial aid package. So you should consider Harvard. But it's much harder to get into Harvard than your state university.
Mark Kantrowitz:
If you get into Harvard, it may be as inexpensive or close to as inexpensive as an in state public college. Now, there is one change this year with the 2024 25 FAFSA. As part of FAFSA simplification, they got rid of what's called the sibling loophole. Previously, if you had multiple children enrolled in college at the same time, the parent contribution portion of the expected family contribution was divided by the number of children in college. So that made it if you had $120,000 of annual income, that was almost like you had just $40,000 of annual income, and you could qualify even for a federal Pell grant in some cases if you had three kids in college.
Mark Kantrowitz:
Now, because this has gone away, it doesn't matter whether your children are twins or separated in ages, by four years, you're going to have to the full student aid index, which is the new name for the expected family contribution, is going to be the same. Both cases, however, there are 187 mostly private colleges that use a form called the CSS profile form for awarding their own financial aid funds. Ivy League colleges are among them, and that form is still going to take provide a discount if you have multiple children in college. So if you have triplets, you might want to include some profile schools among the colleges that they're applying to. And there are some colleges that also have a kind of bogo buy one, get one free if you have multiple children all going to that same college.
Mark Kantrowitz:
So there are still some options that may be much less expensive than paying that 90,000 times three to send your children to the most expensive colleges in the country. But you can still, with five to nine plans, you could defray the costs of that financial impact of sending three children to college. And you can shop around for less expensive colleges. Every college has to have what's called a net price calculator that provides a personalized estimate of what it'll cost after grants to send your child to that college. So you should use that before the children apply to college to get a personalized estimate of what it's going to cost so that maybe you can steer your children to the less expensive colleges.
Mark Kantrowitz:
There are subtle ways to steer your children to the less expensive colleges. For example, you could go visit the college on the day that the cafeteria is serving the food that the child likes the least or on a rainy day. Those can have an impact on what the child likes. And plus, just be honest with your child about college affordability and you'll find that oftentimes the children will make a more beneficial decision all on their own if they know that it's going to be a financial stretch to send them to that soon to be hundred thousand dollars a year college. And we have $95,000 as a max this year.
Mark Kantrowitz:
It's only a matter of a year or two before we start seeing colleges that charge a sticker price in the six figures.
Jim Puplava:
Wow. Well, let's talk about getting financial aid. I want to begin with scholarships and then go to financial aid. So let's begin with scholarships. On your website, you talk about how to avoid college scholarship mistakes when you apply.
Jim Puplava:
So let's begin with that.
Mark Kantrowitz:
Right? So the first thing is to start searching for scholarships sooner. And many families wait until after they've gotten into college to start searching for the scholarships and figuring out how to pay for it. And that's a little late because half of the scholarship application deadlines occur in the fall of the senior year and not in the spring. Plus, there are scholarships you can win in younger grades, not just during your senior year in high school.
Mark Kantrowitz:
And there are even scholarships that you can only apply for after you're enrolled in college. So you should start searching sooner and then continue searching beyond the senior year in high school. The sooner you start searching, the fewer deadlines you're going to miss. Now, many families assume that all they need to do is get a scholarship and everything's taken care of. But the average amount that the typical student in a bachelor degree program is using from scholarships to pay for college is just under $5,000.
Mark Kantrowitz:
And the odds of winning a scholarship is about one in 6.6. That's about 15%. So scholarships are part of your plan for paying for college, but not the entire plan. But maybe you'll be one of those lucky ones who wins a very lucrative scholarship. The most financially generous scholarship is the Regeneron Science talent search.
Mark Kantrowitz:
The top prize there is $250,000, but you have to be a really top student in science or mathematics or engineering in order to win that prize. And that's the only one of the top 40 who wins a $250,000 scholarship. The amounts decrease for those in the rest of the top ten and then the remainder. The remaining 30 in the top 40 win $25,000 scholarships. You can't really count on it, and it's really hard to win this scholarship.
Mark Kantrowitz:
And similarly with the other scholarships that offer six figures, it's worth a shot, but you really have to be top in your field in order to win those scholarships.
Jim Puplava:
And let's talk about in terms of scholarships, academic scholarships versus sports. I have a client whose son is one of the best baseball players in the state, listed as one of the top four. So let's talk about sports scholarships because many times if you're going to play for a particular college football or baseball team, they may cover everything.
Mark Kantrowitz:
Well, only about 2% of students in bachelor degree programs are receiving a sports scholarship, and it typically is merely replacing the money that they would otherwise get from need based financial aid. I see the athletic scholarships as more enabling the students to buy up to a better quality college than providing any kind of a free ride. Yes, some people do get free rides, but most students are getting the NCAA scholarships, are getting a relatively small amount of money. And there are also independent scholarships. But again, these aren't six figure scholarships.
Mark Kantrowitz:
These are a few thousand dollars, typically maybe as much as $10,000.
Jim Puplava:
Let's move on to financial aid. Scholarships are out of the question, or at least you try and it didn't work. Let's talk about applying for financial aid and some key characteristics that you would need to put on the FAFSA application that makes it more likely that you can get aid.
Mark Kantrowitz:
So only about 10% of the grant and scholarship aid comes from private scholarships. About half comes from the colleges themselves, but that in many cases functions as a discount on tuition. They're effectively recirculating the tuition dollars they get from some students to provide scholarships for students they're trying to recruit, whether that is trying to recruit low income students who otherwise couldn't afford, or students who have very high admission test scores or who have won awards or even the athletic scholarships. So the key here is the free application for federal student aid, or FAFSA form is used to apply for financial aid from the federal government, but it's also used at state governments for their financial aid awards as well as most colleges and universities for their financial aid. Now, there are, as I mentioned before, there are 187 mostly private colleges that use a supplemental form called the CSS profile form.
Mark Kantrowitz:
It's run by the college board, and the profile form is used to award the college's own financial aid funds. It is not used for federal or state aid. So if you're going to a profile school, you'll need to file the profile form in addition to the FAFSA form. Now, the Fafsa has gotten much simpler. Now, starting with 24 25, it has probably about a third the number of questions that were used before.
Mark Kantrowitz:
It's dropped from 108 to less than 46, sometimes a lot less. It will be transferring data from your federal income tax returns into the form through something called the IR's direct data exchange. If you don't consent to that transfer, your child's not going to be eligible for any student aid. So you need to consent. And each contributor to the form, the student, the parents, they need to consent.
Mark Kantrowitz:
So it's not just the student consents, and it's also the parents who have to consent. And the FAFSA is based on the income from the prior year, from two years prior. So for the 24 25 FAFSA, it's based on 2022 income and tax information. So you need to be careful about having a significant increase in your income two years prior. Obviously, if you're filing the FAFSA now, it's too late to change that income.
Mark Kantrowitz:
But certainly if you're planning ahead, you can make sure that starting January 1 of the sophomore year in high school, you don't artificially increase your income, maybe through taking a distribution from a retirement fund, realizing high capital gains without offsetting them with losses, or getting a really big bonus instead of deferring it or taking it a little early. The other thing to realize is that assets are reported as of the date the FAFSA is filed. So if you've got a lot of cash in the bank and you also have a lot of debt, using that cash to pay down that debt will reduce your assets from the FAFSA's perspective, and thereby make you eligible for more need based financial aid. So the FAFSA is supposed to be much simpler. And for those who didn't encounter problems, it was much, much simpler.
Mark Kantrowitz:
I've gotten questions from parents who said, didn't ask me any questions about income or taxes or any of that, did I do something wrong? And they were surprised at how simple it had gotten. The problem is that the FAFSA has had a lot of bugs, a lot of implementation problems, and some families, especially mixed status families, have been unable to file the form, and there have been problems with the IR's direct data exchange. It transferred incorrect data, and now they're going to start transferring the correct data soon. So obviously, the May 1 decision day is no longer going to be effective for most colleges.
Mark Kantrowitz:
And they also had a problem. There was a bug involving student assets for dependent students where they omitted certain types of assets from the calculation of the student aid index. They have already started fixing that problem. But as you can see, there's just been, every single day there's been a new problem popping up. And as of right now, there are 19 unresolved problems that and when they released new capabilities like the ability for applicants to make corrections to their form, well, then there were four new bugs in the system that they're working on fixing.
Mark Kantrowitz:
So it has been a complete fiasco in a disaster. And the chief operating officer at the US Department of Education recently announced that he's resigning from the position. And maybe this is a reason why.
Jim Puplava:
I want to come back to something that you mentioned, and I've seen this really cause problems for individuals. And that's, you know, you had two good years in the market, 2020, 2021, and then we had the disaster in 2022. When you take large capital gains, it not only could affect, lets say, your FAFSA form, but also it impacts people with their Medicare premium. So you got to be really careful. Theres almost like a double whammy you could get hit with if you are fortunate enough to take these large gains.
Mark Kantrowitz:
Most people who are affected by unusual financial circumstances should appeal, and that can include a change in income from the prior, prior year to the present, as well as unusual expenses that distinguish them from the typical families, such as high unreimbursed medical or dental expenses or high dependent care costs for a special needs child or elderly parent, anything like that. You submit a financial aid appeal to the college with a list of the special circumstances that affect your ability to pay, and some copies of third party documentation like you've lost your job, a copy of the layoff notice, or you're receiving unemployment benefits and proof that you received unemployment benefits within the last 90 days. Now, there is something kind of interesting and new with this year's FAFSA, which is because the FAFSA is having greater alignment with federal income tax returns. Anything that doesn't appear on the federal income tax returns is they omitted lots of those questions. Now, in particular, if you have 401k contributions, normally in previous years, those contributions would be added back into income so that you can't manipulate your income by increasing your 401k contributions.
Mark Kantrowitz:
But since 401k contributions don't appear on the federal income tax return, starting with 20, 24, 25, those 401k contributions won't be added back in. So if you increase your contributions to your 401k, you can artificially reduce your income. From the point perspective, of the fafsa. On the other hand, IRA contributions do appear on your federal income tax return, and so those still count even now. A Roth IRA is not deductible and therefore doesn't appear.
Mark Kantrowitz:
And that's after tax dollars. So you can do that. On the flip side of the coin, distributions from retirement plans, whether a 401k, an IRA, or even a Roth IRA, do get reported on your federal income tax return and will affect your aid eligibility because they'll be counted as income, which means as much as 47% of that distribution amount will reduce and will increase the student aid index and thereby reduce your financial aid eligibility. So it's tricky. And I said Roth IRA.
Mark Kantrowitz:
Even a tax free return of contributions from a Roth IRA does get reported on your federal income tax return and therefore will get counted as income on the FAFSA reducing aid eligibility.
Jim Puplava:
Mark, is there any level of income that you would be wasting your time applying for financial aid? At what level does it make it unlikely you're going to get some kind of financial assistance? Is there an income level that you know of that is kind of like a threshold? If you're above that, don't bother.
Mark Kantrowitz:
There is no explicit income cutoff on aid eligibility, however, and this used to be more precise because of that sibling loophole. So before, if you had multiple children in college, we would have to say, okay, how many kids do you have in college? And therefore, that would have an impact on what that income cutoff, effective income cut off would be. But now, if you can afford to pay for college with pocket change, you're probably not going to get any federal student aid other than possibly the federal student loans, which is if you believe that the student needs to have skin in the game, then the federal student loans are a reasonable way of doing it because you're unlikely to over borrow. If all you borrow is just the federal student loans, you find yourself needing to borrow, private loans or parent loans, there's a good chance you're paying too much for that college and maybe should consider a less expensive school.
Mark Kantrowitz:
Now, the number of family members still has an impact on aid eligibility. I'd say that if you're top one percenter in terms of income or assets, you're probably not going to get financial aid. But a lot also depends on where the child goes to school at a higher cost college. You may get financial aid from the college even if you don't qualify for financial aid from the government other than the federal student loans. Whereas at an in state public college with the lower college costs, you probably won't qualify for money from the college.
Mark Kantrowitz:
And certainly those colleges may be less expensive than a higher cost private college, even if you get no financial aid, because the average net price for a four year college that's a private college tends to be higher than the sticker price at an in state public college.
Jim Puplava:
So as we close, Mark, if our listeners are looking for help or looking for information, give out your website. You have a wealth of information from everything from financial aid, student loans, scholarships, 529 plans, FASA forms. Just a wealth of information, almost like one stop shopping if you're talking about getting some kind of financial assistance.
Mark Kantrowitz:
So the website that I think you're thinking about is the college investor, the collegeinvestor.com. And I just write for that website. I also have a website about student loans, and this is my personal website and that's privatestudentloans.guru. And I've also been involved served as publisher of several other websites such as Savingforcollege.com. I'm no longer a publisher of that website, but it's still a good website.
Mark Kantrowitz:
Fast Web is a free scholarship matching service, has the largest and it's the most popular of the free scholarship matching services. So there are plenty of good websites out there as well as the federal government has their studentaid dot Gov. that is a good source of information about federal student aid, such as the Pell grant, federal work study, and the federal student loans.
Jim Puplava:
All right, well, listen, Mark, as always, it's a pleasure having you on the program. You're a wealth of information about financial aid. Thank you for coming on the show.
