Does Saving Penalize Parents of College-Bound Students?

As students come to the end of their high school years, the question of college selection and college funding becomes paramount in the minds of parents and, in some instances, grandparents. Of course, completion of the dreaded Free Application for Federal Student Aid (FAFSA) form is the first step parents must take. The FAFSA form is the gateway to receipt of federal financial aid for many lower and middle-income families. It determines a family’s “expected family contribution.” For lower income families, this number is crucial to their college funding planning.

However, this number often works to the detriment of many middle-income families who have worked hard, saved, sacrificed, and delayed gratification for many years in an effort to save for the education of their children. These families have foregone expensive homes, vacations, and other material possessions so that their children are not burdened with onerous college debt when they graduate. The result of this frugality, in many instances, is denial of any financial aid. Perversely, the system does not encourage parents to save for college. In fact, it may penalize those who do save! Therein lies the quandary.

A recent article in The New York Times titled “The Best Way to Help a Grandchild with College” noted that use of 529 college savings plans may be one of the best ways to help a grandchild. The article suggested that grandparents, whose intention is to be helpful, might actually impede the chances of the receipt of federal financial aid.

To avoid this, the strategy suggested by The New York Times article is to delay distribution of 529 Plan funds until the last two years of college. Alternatively, instead of establishing a 529 Plan, the article suggests that grandparents simply give the money directly to the parents of the student as well as a range of other tactics to maximize the amount a student may receive in financial aid.

In a recent interview in his newsletter Inside Personal Finance, noted financial advisor Ric Edelman posed a question to Dr. Donald Farish, president of Roger Williams University. Farish had recently written a letter to the editor responding to The New York Times article. In that letter to the editor, Farish pointed out that if a family does not qualify for “need-based” aid, and their child does not qualify for merit-based aid, because the child has not excelled at the highest academic levels, that family is at a disadvantage. This, according to Edelman, causes many “indignant parents” to “fight back against what they perceive as unfair policies” that penalize them for thrift, hard work, saving, and deferred gratification. Hence, grandparents seek creative ways to maximize their 529 Plan investment.

Farish responded by pointing out that students with little or no financial need are accepted to universities in greater numbers than students with significant financial need. He also pointed out that even people who have saved very little for their child’s education will most likely not get a “full ride.” These students will leave college with debt, sometimes a considerable amount. Last, Farish pointed out that his institution, as well as a growing number of others, has chosen not to increase tuition for five years to improve affordability for parents paying the full price of tuition.

Dr. Farish’s reply is interesting. Although he does point out several things to mollify the impact of the FAFSA and “expected family contribution,” he offers little to address the issue of the impact on hard-working, thrifty middle-class families, nor does he address the issue of family frugality vs. profligacy. This, in my view, is the core of the dilemma – Where is the incentive to save when the system penalizes those who do save?

It is fair to assume that the very wealthy are not at all affected by any of this, because they are able to send their children to expensive private universities with little or no financial difficulty. However, what about the middle-income family that has saved assiduously for eighteen years? These people have foregone vacations, home upgrades, home improvements, new cars, and a myriad of other things. They have, unfortunately, also compromised their future retirement savings for the sake of their children.

Dr. Farish concludes by stating “But if higher education doesn’t step up for the value of the common good, who will?” This is a very noble and interesting philosophical point, and I do not disagree with Dr. Farish on this point. It does not, however, address the real-life, practical, tangible problem facing middle-class parents.

I teach sociology at a community college. I certainly understand the fundamental issues of socioeconomic inequality, income disparity, and racial disparities in America that have resulted in a significant achievement gap between white students and minority students. I get that. I have seen it in my classes for thirty-three years.  However, I also understand the impact of rampant materialism in American culture and the attendant debt crisis that affects all too many Americans.

Yes, it is a sociological and philosophical dilemma. It is also a financial and economic dilemma for the nation as a whole. I, for one, would rather see a saving nation rather than a deliriously debt-ridden nation. And, yes, the least financially secure among us should be helped to attain a college education. This should be a national goal to reduce socioeconomic inequality, income disparity, and the academic achievement gap in our schools. However, that does not mean that middle-income families who game the system by accumulating large amounts of debt or whose grandparents pave the way for their college education by manipulating the 529 Plan should benefit from financial aid.

Are we not, through the current FAFSA rules, encouraging the continuation of irresponsible spending and personal debt by rewarding debt and discouraging saving? Do these same FAFSA rules encourage “creative” ways to avoid the watchful eye of the FAFSA program (grandparents deferring payment to grandchildren to avoid an increase in a family’s “expected family contribution). Last, are we not denying hard-working, thrifty parents the financial assistance they often need and deserve, by penalizing them for eschewing irresponsible spending and debt?

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