College support is back in the news as a young woman resident in New Jersey has sued her parents to contribute to her undergraduate education at Philadelphia’s Temple University.  The case brings us to revisit the question of how college agreements need to be molded to meet with the new realities of post secondary education.

First we should note that New Jersey does permit Courts to award contributions to a child’s college education even where parents have not agreed.  That once was the law in Pennsylvania but all of that changed in 1990 when the Pennsylvania Supreme Court held in Blue v. Blue, that Courts had no business imposing this obligation without legislative authority.  We covered that sad history in our blog titled “The Emancipated Child” published on June 23, 2009.

But the mere fact that Pennsylvania no longer requires support of adult children after completion of secondary school does not end the discussion.  Many parents want to be a part of that experience but that desire is more often than not tempered by the desire to do this in tandem with the other parent. There once was a time when a parent would gratuitously state: “I want to fund my kid’s college.” But that was in a day when such an obligation could be paid in total for less than a single semester at a private university costs today. Times have changed.

Aside from the escalating cost of post-secondary education, the most important change in recent years has been limitations on the “ability to comply” with these agreements.  A generation ago, employment and career paths were more stable.  A parent in his/her late 30s or early 40s with an established career could feel comfortable in the belief that their well paying job would be there when the college admission letter arrived.  Today, that job stability is much more fragile.  In the past decade it has been the mid to senior level executive who has been the target of downsizing, often after a lengthy career with a single employer.  Suddenly, the college contribution provisions of an agreement that seemed an afterthought when negotiated in 2000 are an almost impossible obligation because the parent owing the obligation is now unemployed or earning less than he or she did a decade before.  Very few of these college support agreements contain clauses mitigating the extent of the obligation to fit the new economic realities.  Today, the attorney needs to address this subject with clauses that address the contingency.

The other subjects are ones of long standing.  They are:

  1. Limiting or in some other way framing the extent of the obligation.  A state school like in Pennsylvania can cost less than $20,000 per year.  Some prestigious colleges can triple that cost.  More and more parents are eschewing the old concept that their child will go wherever he or she is admitted.  These costs are paid in after tax dollars and parents are correct to question the value of what they are buying.
  2. Children and parents owe each other a duty to consult about where the child will be enrolled if the parents are to contribute.  No parent wishes to learn this vital and expensive news by surprise.  We have litigated cases where the failure to consult has been fatal to the enforcement of the obligation to contribute.
  3. Absent extenuating circumstances such as illness, children should be given a clear understanding that enrollment must be continuous and full time if a contractual college provision is to be workable.
  4. Last but not least is the matter of academic performance.  Full time enrollment with failing grades is not an investment but an economic waste.  A minimum grade point average is the least the student can contribute to this lofty enterprise in self-improvement.

    So if you are in the midst of negotiating an agreement, make certain that these details are addressed in some way so that you can have some control over your child’s destiny to the extent that it is underwritten with your resources.

Today began with a meeting with co-counsel and clients to follow through on matters we had resolved by agreement reached earlier in the summer.  The parties have two children, one of whom is heading into the age of college search.  Our agreements contain some reasonably clear provisions about continuous enrollment, consultation with parents and suitable grade point average.  But today’s subject ventured into the field of funding for college.

The landscape of college planning has become very foggy in recent years.  The conventional wisdom was to start early and make regular contributions to Uniform Minor accounts or to 529 Plans.  The more you saved, the less traumatic the college shopping process would be.

That was then.  This is now.  In today’s discussion when one of the parents mentioned putting money aside for the soon to arrive day of matriculation, I casually noted that having lots of money saved for college might make the applicant a very solid candidate for admission but a very weak one when it came time to discuss what has become known as the “package.”   The package is not something delivered to your door but the array of loans, grants and subsidies for which the admitted student can be eligible.

As I returned from my meeting, I picked up the Wealth Management supplement to the September 22 Wall Street Journal and read an article by news editor Charlie Wells titled “Mistake Parents Make With College Aid.”  If there was a positive note to the article I somehow missed it.  The article begins with the story of a middle aged single mother who looked at her own financial situation and estimated that her son would be eligible for a reasonably substantial “package” at nearby Farleigh Dickinson University in New Jersey.  The mother had the good fortune to remarry a few years ago but did not consider when doing so that her new husband’s financial condition was going to be counted in deciding whether her son (his stepson) would qualify for aid.  As it turns out son finished college but with a huge student debt that probably could have been mitigated had Mother opted to merely live with, rather than marry, Husband #2.

The article then described college aid red flags.  Some are easy.  If your little student inherits from Aunt Tilly in DesMoines while attending college, his inheritance will count against him in terms of eligibility. But suppose a parent gets a great offer on his/her house at the shore and decides to sell, triggering a large capital gain.  Or worse; suppose Father is downsized by his Fortune 500 employer so that he gets a large severance and sees all of his benefits paid out.  Yes, that was a handsome tax return he filed but he’s now 52 and has few prospects for any other comparable employer to pick him up.  A year earlier his daughter might have qualified for a package.  But the sudden and unforeseen distribution of accumulated severance and benefits means too much income is showing for daughter to be an eligible receiver.

Money from grandparents, putting funds in a student’s name, remarriage or even purchase of a pricey car or home can all trigger review and withdrawal of various forms of student aid.  It seems good fortune can cripple you (e.g., inheritance) or bad fortune (e.g, loss of job with severance) could do the same.  So can one really “plan” for college?  Of course the answer is yes but today one must be prepared for a good plan to be spoiled by “events”.

The article suggests that financial aid decisions can be appealed to the conferring institution.  But one does have to wonder how badly a $60,000 a year college financial aid evaluator will feel about cutting aid to a student whose Mother was just cut from a $170,000 a year job with a $400,000 package of severance and benefits.  But if you are among those who is not feeling badly for daughter, the same Journal section features a graph showing that a four year private college now averages just under $45,000 a year.  This means “all in” costs of a private college education are $180,000 after tax dollars. Assuming a marginal income tax rate of 30%, parents have the need to earn $260,000 to pay that $180,000 education bill.  If we take the $400,000 pre-tax severance package and reduce it by 35% because that’s where the new rates take us, $400,000 pre-tax feels more like $260,000 after tax.  So the severed employee can look at his “package” and say “Well, I got my kid’s school paid for and an additional $80,000. That’s roughly six months of income. “

 

Leslie Spoltore, a partner in our Wilmington, Delaware office, just posted a blog entry on an unusual alimony argument made on appeal to the Delaware Supreme Court.  The family court evaluated the ex-wife’s expenses when calculating alimony she would pay to her ex-husband and reduced the significant contributions she made to her church down to what it deemed a "reasonable" amount of $100.00.  The Court considered it a voluntary reduction in income. This is not unlike how Pennsylvania’s courts add back, for instance, voluntary contributions to 401(k) accounts when calculating child support and alimony pendete lite. 

On appeal, the ex-wife claimed that the Court’s assessment of alimony based on their consideration of her available income resulted in her inability to appropriately tithe her church and violated her First Amendment freedom of speech.

It is an interesting and creative argument, but did not carry her case and the Supreme Court ruled the family court could consider any factor it deems appropriate and nothing prohibited her from contributing as much as she would like to her church.

Read Leslie’s blog entry and link the decision here.

The Weekend Edition of the Wall Street Journal on February 19-20 reported on something most of us already knew:  Americans are not saving enough for retirement. The proposition is old but the data is new and, therefore, worthy of attention.

Why is this germane to a series on Separation and Divorce?  That’s easy.  In divorce we divide retirement savings that a couple has accumulated during the marriage.  In many instances the savings for retirement were calibrated based upon the principle that two live almost as cheaply as one.  But when the two go their separate ways, the economies of scale go out the door with them. That means re-thinking retirement plans in realistic ways.

 

The Journal’s research comes from several sources including Boston College’s Retirement Research Institute.  Roughly 60% of Americans approaching retirement have 401(k) plans.  Almost all Americans are eligible for some form of social security payment. These two devices are the engines of retirement income. The Boston College data shows that households headed by folks ages 60-62 with 401(k) type plans have median income of $87,700 in 2009.  The benchmark of most financial planners is that in retirement you will need 85% of your pre-retirement income to enjoy a comfortable lifestyle.  Eighty-five percent of $87,700 is $74,500 per annum or just over $6,000 a month.  For these median Americans social security will provide about $35,000 in income.  So the “gap” between the income target and the social security benefit is about $39,500, or $3,300 a month.  That’s where retirement savings on the individual’s part comes in.  The typical 401(k) for our near retirement couple is averaging $150,000.  New York Life Insurance would suggest that the balance be funded with a fixed income annuity.  An annuity through NY Life, however, throws off only $9,000 in income, or one-quarter of what we need based on current returns.  To get the income up to $3,300 with a quality annuity would require an investment base of $630,000.

 

About half of those on the cusp of retirement also have defined benefit retirement plans. These plans are a form of annuity themselves and the typical retiree with a defined benefit plan can bank on $26,500 a year or roughly $2,200 a month upon retirement.  For those folks the shortfall that must be made up by savings is only $13,000 a year.

 

All Americans over 30 years of age should be looking at how these numbers affect them. Admittedly young people view retirement as someone else’s problem. But the longer retirement contributions are ignored, the more implausible a sound retirement becomes because the funds do not have enough time to build value through investment.  The starting point is to assess what is projected to come from social security.  From there on, it is mostly going to be individual retirement contributions that will make the difference as defined benefit plans paying out monthly stipends continue to evaporate from the private sector.

 

Vanguard Group has recently increased what it deems to be the model for retirement savings from 9-12% of income to 12-15%. This means that couples with household income of $100,000 a year should be funding retirement savings at the rate of $1,000-1,200 a month.

 

As we noted at the outset, reassessment is required when a couple divides their retirement and doubles their expenses by moving from one household to two.  Commonly the impact is to defer retirement and scale back lifestyle expectations when it does occur. This is, for most, a price of divorce that cannot be avoided.

 

Bear in mind, the Journal does not discuss this, but we counsel clients to think carefully about what their expenses will be going into retirement.  The conventional wisdom is that living expenses constitute 85% of pre-retirement income.  However, upon retirement two large pieces of modern household budgets often change dramatically.  People who take on a 30 year mortgage at ages 30-35 should have satisfied that mortgage by the time they retire.  The home mortgage is commonly the largest single household expense.  The second largest is health insurance and 65 is the age when Americans become Medicare eligible.  Most of us will buy a supplemental policy at age 65, but we can hope that this coverage will be less expensive than the private plans we now pay to maintain.

 

The other thing to be learned from the Journal article is to invest conservatively.  The sad stories recounted there frequently involved folks who “took a chance” on investments calculated to make them wealthy rather than secure a retirement.  As most of us who were invested in 2008 learned, many of the high flying investments in real estate or start up companies crashed and burned in the last recession.  Sadly, that money is not coming back for those who are the vanguard of the baby-boom retirees.

In the process of handling a divorce where minor children are involved it is not uncommon for the parties to at least broach the subject of contributions to an undergraduate degree or vocational training for a child following high school.  This was once a pretty easy subject as Pennsylvania required separated parents to contribute to this form of enterprise from 1963 to 1992.  But that abruptly ended when the Supreme Court of Pennsylvania found that lower courts had imposed this duty without the imprimatur of legislative approval.  With the 1992 ruling in Blue v. Blue, 616 A.2d 628 college was only going to be ordered where the parties agreed.

The other driving force that had affected this area is the spiraling cost of college.  This author graduated from George Washington University in 1977 at a time when a year of college was a $5,000 experience.  Today, that same experience at the same university is 10x more expensive.  And while recent alumni have been quick to remind me that the school has improved vastly in the thirty years since I was emitted, I feel safe in my retort that it certainly is not 10x better. Even when adjusted for the Consumer Price Index, the $5,000 of circa 1977 should today be just under $18,000 in 2010 dollars.

So, we live in an age when a commitment to send a child to college can easily be a $200,000 obligation.  That will require roughly $300,000 pre-tax dollars, a fairly staggering sum for even affluent parents who are living together.  It becomes all the more dicey when net worth and income have been subject to proceedings to dissolve a marriage.  This means that agreements relating to support a college kind of experience need to be carefully considered and drafted if the commitment is to be something more than “We’ll do what we can.”

The easiest approach is to start the savings process early.  Uniform Transfer to Minors Accounts is one device. 529 Accounts are a second.  They come with different characteristics relating to accessibility but the key point is that the more you save now, the more will be available when college time comes.

But, what about limits on the contributions.  There is a big difference between a college education and a child’s dream college experience. We recently litigated a case where a child with a C+ average and board scores in the 1000 range wanted her parents to underwrite a $45,000 per annum private college experience. Is that a reasonable expectation? One parent said yes and the other no.  The agreement was silent except for a consultation clause related to college selection.  There is a tendency on the part of parents to be lenient when they execute these agreements because they feel guilty that they have “ruined” their child’s adolescence by splitting up. Kids are certainly affected by divorce but does an expensive college somehow make up for an experience, like divorce that is ubiquitous. Does the child of divorce get a BMW as his first car if mom and dad are separated, but a Focus if they stay together.  Economic decisions need to stand on their own and not be driven by guilt.  They also need to have some fail safe provisions.  We are seeing many folks who were earning hefty incomes and could easily have once afforded almost any college costs caught in the crossfire of a bad economy that this time has afflicted the management class almost as harshly as the working poor. Unemployment benefits of $400 a week leave little room for contributions to college.

Then there is the role of the child.  What are to be his or her responsibilities?  Today a child with mediocre grades and boards can still pull a quality college admission if he or she is willing to pay full freight. Does that mean the parent must commit as well? And if so, for how long?  Today only 30% of liberal arts majors complete their degree in four years. Is there a minimum grade point average that must be maintained or will the standard be how low can you go? Bear in mind that without a waiver of the student’s rights under a law called the Federal Educational Rights and Privacy Act, a parent has no right to a student’s grades or to know whether the student missed class because he was at the university hospital’s detox unit.

The issue of timing payment is also a minefield.  We have many agreements in our files that say each parent will pay a percentage of tuition or other costs.  But, we are seeing that many parents don’t reveal their incapacity to pay until the arrival of the college invoice. In once recent instance, we had a parent decide that the best way to save for college was to roll the child’s tuition savings plan into a lovely beach house.  That was four years ago when shore property was hot.  Chances are that child is not going to college until the market absorbs the huge inventory of unsold property that has been accumulating since 2007.

We conclude that college is a good thing and sensible provisions for it are as well.  But the price of education has escalated to a point where college or any other post secondary education needs to be carefully planned for if the investment is to be achievable and productive.