College Planning

Posted by   admin on    March 1, 2004

Do you feel badly about considering or expecting your kids to pay for at least some of their own college education? But wait a minute - isn’t paying for your child’s college education considered a birthright? Isn’t it the obligation of every parent to do so?

By choice or by necessity, the decision of whether or not to pay for college is an unwelcome issue that many parents are currently facing. Why? Because, with no end in sight, college costs have well outpaced inflation. And with many parent’s retirement savings plundered by the bear market that occurred during years 2000 through 2002, together with decreased

employment opportunities, those who fully intended to pay for their child’s post-secondary education may find they just can’t afford to do it.

As mentioned in our prior newsletters, we strive to provide articles on various aspects of wealth management to assist your understanding of why planning for the present and for your future has importance. Yes, we also promote our services; yet, you will find that we always seek to present thought provoking topics that are relevant to our wide audience. (By the way, with your help, our readership has grown and we have resolved to archive past newsletters on our web site. Keep those referrals coming! We appreciate it!)

Next to buying a house, college expenses can be one of the biggest financial projects that parents and their children undertake. In this month’s letter, we will discuss several ways you can make a valuable contribution to your child’s future even if you won’t be writing a check to pay for their college costs.

At the end, please review our performance update. Then compare us against the Lipper data for low risk, balanced fund managers and you’ll find that we continue to be well on our way to becoming one of our nations top performing money management firms!

So, Mom and Dad, Are You Going To Help Me Pay For College?

Do you feel badly about considering or expecting your kids to pay for at least some of their own college education? But wait a minute - isn’t paying for your child’s college education considered a birthright? Isn’t it the obligation of every parent to do so?

By choice or by necessity, the decision of whether or not to pay for college is an unwelcome issue that many parents are currently facing. Why? Because, with no end in sight, college costs have well outpaced inflation. And with many parent’s retirement savings plundered by the bear market that occurred during years 2000 through 2002, together with decreased employment opportunities, those who fully intended to pay for their child’s post-secondary education may find they just can’t afford to do it.

Financial writer, Terri Cullen, writes, “A 2000 study by the National Center for Education Statistics showed that less than half of full-time students from middle-income households (earning $74,999 or less a year) received financial assistance from their parents to pay for tuition at a public, four-year school. In a similar 1996 study, some 68% of parents of middle income families had made a direct contribution to college costs.” However, choosing not to pay for college can lead to hurt feelings and create a considerable financial burden that your children might shoulder for more than a decade. If you've determined you can't or won't pay college costs this year, there are ways both emotional and practical, to prepare your kids and help them manage the burden.

Discuss The Situation With Your Child

Be honest about why you won't be picking up the bill. The reasons do not always have to be limited to finances. Reasons having nothing to do with money can arise from any number of conflicting social, religious or moral beliefs and differences between parents and children.

Additionally, the potential for emotionally charged and difficult discussion can arise in households where step-parent(s) are involved. Can help be expected from the non-custodial parent, if living? Will such help be voluntary or need to be forced?

Depending on the values and belief system in some households, it may be considered a good idea for a child to bear at least some part of the burden of paying for his or her own education. This generally follows where there is a belief that students tend to take their education more seriously when having to pay their own way.

Ignoring The Situation Is Not An Option

Next to buying a house, college expenses can be one of the biggest financial projects that parents and their children undertake. The cost of a four-year degree can range from tens of thousands to above one hundred thousand dollars before considering the costs of pursuing an advanced degree.

Zero involvement, on the part of parents, may not only significantly increase the cost burden of a post-secondary education for your children. It might decrease the chances of your child getting into the optimal program or, worse yet, discourage them from attending school altogether.

If you can't, or don't want to, pay for your child’s college costs, you can make a significant impact by helping your child apply for financial aid. In fact, even if you are going to help foot the bill, you will want to apply for aid anyway!

What Is Financial Aid?

There are a variety of financial aid tools available to students today, including scholarships, grants, work-study employment and student loans. Despite a popular belief that financial aid is awarded only to top students and athletes – merit-based – the fact is that most of the available student financial aid is need-based.

Need-based Financial Aid

Well over 50 percent of today's college students receive need-based aid. Need-based financial aid eligibility is based on two simple issues - cost of education and family ability to pay.

The cost of education, which can vary significantly from institution to institution, includes all reasonable costs (tuition, room, board) of attendance. Required amounts of expected family contributions – ability to pay – should vary far less from institution to institution, because the formulas in place ensure that most expected contributions are similar.

The formulas consider a variety of family circumstances when determining eligibility. Consequently, there is no real cut-off point or maximum income a family can have and still qualify for assistance. You may be surprised to learn that an increasing number of families with significant incomes now qualify for assistance. Every student, regardless of financial situation, should consider applying for need-based aid.

How Do I Apply for Need-Based Aid?

There are two need-based aid applications being used nationally, the Free Application for Federal Student Aid (FAFSA) and the College Scholarship Service's PROFILE. If you are applying to a college whose aid awards include significant levels of institutional funding, there is a good chance that the school will require both forms. Also, if you are unsure as to which form is required, check with the school or simply file both forms. You want to assure yourself access to all available funding, so don't take any chances.

The FAFSA and the PROFILE are essentially personal financial statements with many questions that correspond to your federal income tax form. If you have completed your most recent taxes, use the numbers from these to complete your applications. If your tax forms aren't available, estimate. You can correct any errors when your tax forms are complete, so don't miss an application deadline because you haven't finished with your taxes. In addition to collecting income and asset information, each form also collects demographic data including family size, parent age, number of students in college and other related information. You are also invited to provide each school with information on any extenuating circumstances that affect your family's ability to support educational expenses. Take advantage of the opportunity to provide this information by writing directly to the college you're considering. Don't be shy -- others will not be.

Both the Department of Education and the College Scholarship Service apply formulas to the information your financial aid applications supply. These formulas, designed by congress and by the educational community, differ in important ways, but each estimates what amount your family can provide toward educational expenses in the upcoming year. This is referred to as the EFC – expected family contribution.

Divorced?

The custodial parent must complete both the FAFSA and PROFILE. Some schools that require the PROFILE will also require that the non-custodial parent complete a Divorced and Separated Form. This document will be included in the PROFILE and should be submitted directly to the college or university. If it is inappropriate for the non-custodial parent to complete the form, or if he or she refuses, write to the school to request an exception to this policy. If the custodial parent has remarried, the stepparent must also complete the FAFSA. There are no exceptions. PROFILE schools will often require information on stepparents as well.

Your Time May Be More Valuable To Your Child

Whatever your reasons for not paying, plan on taking an active role in the process. Take the crucial first step by breaking the news to your child. Sit down, ideally before their senior year in high school, and explain your decision calmly. The more time the child has to adjust to the reality of the situation – and research alternatives – the better.

After the conversation, try to ease the stress of the coming months by helping your child locate alternative sources of funds. Visit college-planning Web sites, create a game plan, make suggestions, weigh options (i.e., going to school in-state versus a out-of-state), identify questions and work together to get the answers.

To help your child find the funds to close that "EFC" gap, start searching together. Begin by doing all you can to help your child tap into "free money" sources. When scholarships and grants aren't enough, it's time to consider borrowing. Be aware, your child won't qualify for federal student loans unless you fill out the FAFSA form.

Tap Family Connections

When times are tight, you sometimes need to swallow your pride and ask for help from family. The good news is that sometimes you can help yourself while helping others. Grandparents are often a good place to start, particularly if they have a close relationship with the child. By offering to help, the grandparents may be able to reap estate-planning benefits. For example, they can move money out of their estate by paying your child's tuition directly to the school, and it won't trigger gift taxes.

Above all, remain engaged in your child's education, even if you're not funding it. Meet with the child's financial-aid counselor at school, not just to get some input on financing options but to show the child you're there for him or her – even though your money's not.

Remember that your encouragement, enthusiasm and participation through the entire process may ease some of fear and disappointment your child may bear at being forced to face the "real world" much earlier than anticipated.

ELF Capital Management Investment Performance Update

Several of you have inquired into when I thought the Fed might raise interest rates. While I subscribe to the theory that raising rates would slow the economy down and hurt job growth, thereby, leading us into a recession, John Mauldin of Millennium Wave Advisors and one of my favorite analysts, wrote in his recent newsletter:

“The Fed is not going to raise rates” anytime soon. He notes “Greenspan just touted the virtues of adjustable rate mortgages this week”. Despite his disbelief that Greenspan would be encouraging risk taking and more debt, he goes on to say “Do you think he would do that if he were planning to raise rates anytime soon?” [Mocking Greenspan] “Hmmm, let me see, what can I do to create the most harm possible? Tell people to get into adjustable rate mortgages and then raise rates? That would cement my reputation.”

Mauldin goes on to say “If Greenspan were to raise rates now and the economy began to slow, the mob would form and someone would start shouting “get a rope” as they headed for the nearest tall tree.”

For the month ended February 29, 2004, the completion of our first year in business, our one-month performance is up 0.44%, our three-month return is up 5.21% and our one-year return is up 21.14%.

For disclosure purposes, past performance is not necessarily indicative of future results and ELF Capital Management LLC (ELF), formerly Hoffman White & Kaelber Financial Services LLC, cannot guarantee the success of its services. There is a chance that investments managed by ELF may lose a substantial amount of their initial value.

ELF is an independent discretionary investment management firm established in February 2003. ELF manages a strategic allocation of primarily exchange traded index funds (ETFs), and may invest in other carefully selected securities. ELF may also employ hedging techniques, through the use of short positions and options. ELF manages individual portfolio accounts for both individual and business clients.

The ELF ETF Strategy returns presented herein represents a composite of actual results from all client portfolios managed by ELF. Currently, it is the only composite presented by ELF and separate client account portfolio positions are substantially similar, except as may be modified for retirement plan accounts and accounts with net equity of $60,000 or less. There is no minimum account size for inclusion into ELF’s ETF Strategy composite and accounts with net equity of $60,000 or less have a tendency to downwardly skew the combined results.

The performance data presented herein includes the reinvestment of dividends and capital gains; as well, ELF’s ETF Strategy composite returns are presented after deducting actual management fees, transaction costs or other expenses, if any. ELF charges an annual investment management fee as follows: 1.25% on the first $250,000; 1.00% on the next $750,000; 0.95% on the next $4,000,000; and, 0.75% thereafter.