<p>I’m talking about the issue that was brought up by the OP. Mini and Northstarmom are changing the issue.</p>
<p>The issue I’m talking about is, “is it fair to savers vs spenders”, not how you deal.</p>
<p>No it isn’t fair to savers. Period.</p>
<p>Now you can talk about how to deal. ;)</p>
<p><a href=“http://talk.collegeconfidential.com/showthread.php?t=293749&page=2[/url]”>http://talk.collegeconfidential.com/showthread.php?t=293749&page=2</a></p>
<p>The link in post #188.</p>
<p>Go to 75 (82 of 126).</p>
<p>It’s easier than it looks to get to the appropriate page.</p>
<p>From the link, the appropriate part…</p>
<p>Two families with identical income histories should, according to principles of horizontal equity, be asked for identical contributions (at least if they are choosing equally priced educational options). But taxing frugal families’ savings means that they will lose out on some financial aid.
There is, of course, no perfect answer to this dilemma. Financial aid professionals tend to focus on the fact that a family with $10,000 of college savings will pay a maximum of $560 more than a similar family with no savings. The family with the $10,000 will have a much easier time financing their expected contribution and will, in the long run, be better off than the family that depends on borrowing and suffers the effects of compounding interest.
But there is a clear perception among the public that savers are chasing a moving target. Every dollar they save in an attempt to be prepared for the daunting expected contributions they face increases the amount colleges will expect them to contribute. Economists also complain about the savings disincentive in the need analysis system. The combined effects of income taxes and need analysis on the marginal tax rates on income and savings may discourage significant amounts of saving. While the maximum annual assessment rate on assets held by parents of dependent students is 5.6 percent in FM and 5 percent in IM,
76
when the assessment rate on the income generated by the asset is combined with federal and state income taxes, only about a third
of the interest is likely to be available to devote to paying the EFC that would exist in the absence of savings. Moreover, the savings themselves are assessed every year. If 95 percent of the asset remains after the first year, and none of the asset is used to pay the expected contribution from income, 81 percent of the asset will remain after four years. If the savings are gradually depleted to pay for college, the amount available each year will be about 22 percent of the original amount saved, not 25 percent.
For students, the problem is even more serious because of the higher assessment rate on both income and assets. Student assets are assessed at 35 percent in FM and 25 percent in IM. A student who earns an extra $1,000 over the summer and saves it for academic year expenses may be expected to contribute an additional $500 out of income, plus an additional $350 out of savings, based on the FM formula.
Clearly, there is a trade-off between reducing the savings disincentive in the need analysis system and recognizing the reality that assets increase ability to pay. The best solution is probably assuring that allowances against assets are adequate, so that assets that have been saved in order to finance expected contributions and will likely be used up entirely when those contributions are paid, do not increase the EFC. This problem is discussed further in the section on Allowances Against Assets, beginning on page 83.</p>