The Tuition Game

By Richard N. Ostling

Given the price tag on a college diploma, even comfortably middle-class parents might be forgiven for wondering where to find $100,000 to send a child to a private college for four years. Many are convinced that if they were much richer -- or much poorer -- money would not be a problem. Some view a private- college education as an entitlement, much like unlimited high-tech health care. Such attitudes harden during difficult economic times and a tight job market, when a degree from a top school becomes all the more precious just when it is hardest to afford.

Congress has now responded to the howls of frustrated parents with new financial-aid rules that are meant to make college more affordable to the embattled middle class. Starting last month, any family, however rich, may borrow the entire cost of college, however expensive, with low-interest government loans (though interest payments are not deferred as in other federal loan programs). Outright federal grants will still be scaled to financial need, but home equity and family farms no longer count as part of a household's assets, which means more middle-class families will qualify.

The problem is the law of unintended consequences; if it is easier to get a loan, colleges may feel free to raise their tuitions even higher. Wealthy parents will be able to borrow at bargain rates. Poorer parents, meanwhile, may be tempted to borrow more than they ever expect to repay; the default rate on government-backed loans is roughly 22% and bound to rise. As for outright federal grants, many more families will be eligible. But Congress has not set aside enough money to cover everyone and so is cutting the maximum grant amount. Neither the states nor the colleges themselves have enough money to make up the difference.

The struggle to squeeze more aid dollars out of a finite pool brings with it some interesting ethical arguments. While their children struggle over SATs, parents will be sitting down with revamped aid applications, about to be issued, to figure out a host of revised rules that take effect Jan. 1. In many cases, the goal will be to look poorer on paper than they really are. Just how unethical is it, they wonder, to outsmart a system they feel is itself unfair? Parents contend that they are penalized if they save for college or their children take part-time jobs, since such savings reduce the amount of aid they can qualify for. Families who rent their homes may now appear just as rich on paper as mansion dwellers. Whites grumble about affirmative action; top students complain that only athletes get big scholarships.

Faced with the choice of delaying college or attending cheaper and less prestigious schools, or missing out altogether, some families engage in a crash course in creative accounting and moral reasoning -- and by mastering the former, fail miserably in the latter. An industry of financial advisers is developing to help steer parents through the aid process, which often means cutting some ethical corners. Some companies charge parents fat fees to "guarantee" funding, often by showing families how to shift assets and hold down reportable income so that they qualify for more aid.

Ethical or not, these tactics are perfectly legal, so long as families do not lie about assets. John Kuzmich, a high school band director in Golden, Colorado, with a Ph.D. in music, managed to obtain a computer-teaching job with lower pay in the hope that his son will qualify for more aid next year. Some families pump as much money as possible into retirement funds, whole life insurance or tax-deferred annuities, none of which are counted as assets. They lend money temporarily from savings to a family corporation. They invest in a condo near campus, which increases debt and provides housing for their child. Or they might mortgage an apartment building and hire their child to manage it, using his tax-deductible "salary" to pay tuition.

Much of this, charges Claire Gaudiani, president of Connecticut College, amounts to "dirty tricks." She argues that duplicitous parents are cheating the needy, defrauding taxpayers and forcing colleges to waste money on detective work. Other administrators agree. Says Orlo Austin, aid director of the University of Illinois at Urbana-Champaign: "There's a whole group of people out there who make their living finding loopholes that were never intended." Families say that everyone else is doing it, that no one gets hurt and that college costs are way out of line. But in fact someone often does get hurt, since anyone who wrings extra money does so at the expense of a family that may need it more.

How can it be unethical, the advisers retort, to apply regulations set by the government? Says Kalman Chany, president of Campus Consultants, a Manhattan-based firm that advises families on aid strategies: "If your accountant showed you a legal way to save $4,000 on your income tax this year, would you take it?" What would really be unfair, he says, would be to deny parents information on the wisest use of the rules. "All we're trying to do is work within the system that exists now and help middle-income Americans benefit from some of their tax dollars," explains Rob Reid of Educational Planning Service in Atlanta. "It's their money financing this."

Gaudiani fumes over this "get whatever you can" attitude. Like most educators, and unlike financial experts, she views colleges more as charitable institutions than as businesses. "It's wrong for us who have an education and who have all the privileges to teach each other how to cheat," she says. Her harsh analogy is not to income-tax advice but to outright theft. "It's easy for a lot of people to condemn youngsters who walk into stores that have been blasted open and take things that don't belong to them. Everyone calls that looting, and it's certainly illegal and not appropriate. But when people with $350,000 incomes shelter that by transferring assets to grandparents and reporting $41,700 and then qualify for $12,000 in aid, that's another form of looting."

Students are often most aware of the flaws. University of Southern California sophomore Vinkey Moroak says one friend got a generous grant even though her father earns $300,000. The secret: the nonworking mother filed a separate tax return and claimed the daughter as her dependent, while the family home was placed in an aunt's name. "They're hurting people who really need the money," says Moroak. "I see people who are on financial aid driving around in their brand-new Mercedes," protests Juan Abenojar, a fifth-year student at UCLA. "What is going on here?"

What is going on, educators contend, is that many families are profligate in their spending and unwilling to sacrifice for education as previous generations have. "It wasn't until the late '60s that federal aid was considered an entitlement," says Cliff Sjogren, U.S.C.'s dean of admissions and financial aid. Sjogren himself dropped out of the University of Michigan for a year to earn money -- an approach he feels is now rare. "When I went to college in the '40s, my parents really had to sacrifice. Now parents are trying to figure out strategies of getting money rather than saving it."

The strategies parents resort to are dictated by the Federal Methodology, used to determine what a family is able to afford and how much federal assistance it can receive. Some calculations will remain the same, including those for two important figures:

-- The Standard Maintenance Allowance is what a specific family supposedly needs to sustain itself. The benchmark family of four with one child in college is allowed $16,180 in living expenses. No adjustment is made for cities with higher living costs. James Belvin Jr., director of Duke University's undergraduate financial-aid office, has "seen it all" when it comes to families trying to wrangle more dollars from the school. "You have people listing more than $1,000 a month for food alone. There's the maid service, dog grooming, country-club fees, tennis and ballet lessons, you name it," he says. "In those cases, we suggest they restructure their financial circumstances."

-- The Asset Protection Allowance fixes the portion of a family's assets that is off limits. For parents, an average of 2.6% to 5.6% of assets is deemed available to spend each year on college. As much as 35% of a child's assets count each year, which discourages the tradition of putting college savings in a child's name.

Parents are typically baffled by the forms, ignorant of the complex formulas and confused by the outcome. The new system will worsen the headaches. Advisers decided in August that the Educational Testing Service of Princeton, New Jersey, which administers the ubiquitous Financial Aid Form, will no longer follow federal formulas in calculating asset and need data that colleges use in making their own local aid decisions. From here on, parents will have to fill out separate federal forms and FAFs, and perhaps other applications to specific colleges. The colleges use the forms to help construct an offer that combines outright grants with low-interest loans and work-study jobs. They take into consideration the cost of the college, whether the parents have other children in school and unusually high medical bills.

But other kinds of burdens are hard to calculate. "The whole financial-aid process can make you bitter," says Marie-Helene Grabman of Charlotte, North Carolina, whose daughter Genevieve hoped to go to Duke. Genevieve's father Michael is a construction manager with income in the low 60s. In reaching their aid offers, Duke and other schools did not to take into account Marie- Helene's own expenses for full-time college study to further develop a % career, or that Michael's diabetes meant the family should set aside medical contingency funds. Complains Michael: "I feel we were punished for saving for our child's education." Genny now attends the University of North Carolina at Chapel Hill, where as a state resident she pays only $7,500 a year. Bill McMahon of Troy, New York, feels squeezed by the system, even though he is a commissioner on the staff of Governor Mario Cuomo. He reluctantly concluded that unlike him, his son Tom could not attend a private college without incurring a huge debt burden.

The financial-aid feuds, however, are born not of downward mobility so much as rising expectations. Lehigh University president Peter Likins notes that many moderately wealthy families think they are middle class and entitled to outright grants. Due to the school's particular pool of applicants, "at Lehigh we have more kids on financial aid from families earning more than $75,000 than from families earning less than $15,000." No longer able to depend on Washington to shoulder a bigger burden of aid costs, Lehigh has been forced to increase its contributions from $2 million to $18 million over the past decade. Some smaller colleges actually spend more on aid than on faculty salaries. "Something radical has to happen," says Likins. "The current system is broken."

With reporting by Sophfronia Scott Gregory/New York and Lisa H. Towle/Raleigh, with other bureaus