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. “