Respectfully, I think it’s a stretch to use “donut hole family” to describe a family earning $300k/yr with $4M in assets.
My understanding of a donut hole family is one that has income or assets that make them ineligible for need-based aid but not sufficient income or assets to afford a particular college. There’s an affordability gap for such families in that they can’t (not “would prefer not to”) pay for a given school.
What you’re describing is a family with more than adequate resources to afford any college in the US with minimal impact on their finances. That’s not a donut hole family. It’s a family who doesn’t want to give up their piece of the donut. That’s fine, but not the same as a family that doesn’t have that choice.
We are each likely to have had somewhat different experiences.
The “donut hole” families that I know are mostly people who work in high tech, who started off with low income and low spending habits. They lived dirt cheap for years. As high tech became a bit more lucrative, they continued their frugal spending habits, lived well under their means, bought a cheap house, drove beater cars, wore blue jeans and t-shirts, and vacationed most often at home or at a relative’s house for free. However, working in high tech and being exceptionally frugal by nature, over time they very slowly managed to save up just barely enough to make need based aid impossible. Quite a few of them have graduate degrees, but more often master’s degrees and not doctorates, and these were obtained back when university was more affordable. Some had their children late, so they had more time to build up savings before the kids got to college age, but they also have less time (or in some cases no time) to recover from the college expenses before retiring.
One exception is a person I know who did not just marry a woman (and a very nice and attractive woman), he also married a house. They live in a house that was originally built by her ancestor in the 1600’s, and that has never, ever been sold. It just keeps getting passed down to children. He realized when they married that they would not be able to sell the house because it would be a family controversy that they could never live down. The house value would be quite high, if it had ever been sold. This particular friend is a Harvard graduate, but he could never afford to send his kids to Harvard. Part of this might be that they had quite a few kids (and good for them).
We once stayed in a B&B in Canada that had similarly never been sold. It had originally been built by the brother of an ancestor of my father’s, and had been passed down to his children and descendants also. It however only dated from the late 1700’s or very early 1800’s and so is much more recent. Also, since they were in Canada, the local very good universities were affordable for them.
And the other exception that I have known are small business owners. They work very, very hard, and are very frugal. I do not recall any of them ever taking a vacation, although in some cases I do not know them all that well so they might take a vacation when I am not paying attention.
The majority of these people work in high tech and are very good at it. They kids are often (not quite always) roughly equally strong students as the parents were.
However, they have all found affordable universities for their children to attend. They just didn’t go to Middlebury College, nor to any private no-merit-aid school in the US. Many could not afford to send their kids to their own alma mater. However, they could afford to send their kids to very good universities, often in-state public schools. The kids I have known all got a very good education and in the vast majority of cases are now doing well.
That is exactly my experience.
This is not all that unheard of in high tech. One big issue is that a lot of us were very poor for many years, and just got used to never spending any money. Then high tech got more lucrative, and our spending habits in many cases mostly stayed the same.
Which leads to the question: Do we want to blow out 30 years of savings in four years of university (times two if you have two kids, times four for a few friends of mine)? For those of us whose kids go on to get a DVM (or MD or DO), we might be very glad that we didn’t blow it all in the first four years of university.
Which might get back to the first point. Blowing out 30 years of savings in four years of university takes away opportunities, such as helping a child with the cost of a graduate program. This might be part of what made Middlebury not worth the cost for us. Of course the trick is to catch this before the high school student starts to apply to universities, where the opportunity cost of either helping or not helping the child with graduate school costs might not start to occur until six or eight years later.
But sitting here more than a decade later: I did not let my daughter apply ED to Middlebury College because of the cost. This meant that we were able to help her some with the cost of her DVM. To me this means that we were right. For us Middlebury was straight out just not worth the cost.
I mean, we would have to start with a precise definition of donut hole families.
The first part is easy–they don’t qualify for need aid. But then there is some additional conditions that full pay is . . . ? They don’t want to be full pay? They actually can’t? Can’t right now, or going back to the choices they have been making since the child’s birth?
OK, so a family with $400K AGI and no assets apparently may not get aid from Middlebury. What conditions would make them a donut hole family? They almost certainly have more than enough post-tax income. In fact, they almost certainly have enough post-tax income to pay for Middlebury and still have way more to spend on themselves than a very large percentage of US households.
I get some of those people may not WANT to spend it on Middlebury. But under what conditions would we say they actually just can’t?
Yes, I was sort of just getting to this in another post as well. In what circumstances would we agree that a $400K AGI/no assets family simply can’t pay for Middlebury, as opposed to merely not wanting to? I’m not ruling it out, but it doesn’t seem to me likely to be a very common cirumstance.
Or to put it another way–I actually don’t see the standard college aid formulas being all that unrealistic in most cases. Meaning when I have looked at the way they work, I tend to agree that yep, you could probably use those financial resources for college if you really wanted to.
Probably the biggest single issue is assessing non-liquid things like homes and private businesses. But secured borrowing is in fact a thing.
I know this won’t be winning me any favors, but I think at least in most cases, it is more, “I don’t want to,” than, “I want to, but actually can’t.”
Everyone has a choice. Many people seem to imply that $400k after tax dollars (or $800k for 2 kids) doesnt substantially impact their finances or they could just choose not to go to Middlebury (or any other highly selective school).
They are probably one of the few, if any, demographic group that has to make this “choice” .
Do low income families have to make this choice? No.
Do middle income families have to make this choice? No.
Do high net worth families have to make this choice? Yes but as a pct of their overall net worth, it’s not substantially material.
So you have this small group of people that either say no to their kids or pay $400k after tax dollars of lost opportunity cost. And very few people have to even make this “choice” at highly selective colleges.
Surely you can’t be arguing that having a valuable home (it can’t be sold- but it has some value that a bank would assign to it, therefore you can borrow against it) is WORSE than not having a home?
There are all sorts of golden handcuffs in the world. Some are attached to an employer, some to a spouse and family, some are self-imposed. “I can’t sell my dad’s classic Porsche- it meant everything to him”. But they can be monetized in some way. And surely having these assets- or the promise of an asset- or a portion of an asset- is more valuable than NOT having them.
I understand the “we came to high incomes late in life” argument. I know several of these families. But to be clear- they are mostly still living the post-grad lifestyle. So the accrued value of their stock, the enormous run-up made possible by their options, not to mention the increased cash flow, just means they are likely in a better position to finance college (whichever college the family decides is “worth it”) than a similar family who doesn’t have a tech worker- the parents work in retail (a battered sector) or one parent is a pharmacist (salaries drifting downward, not upward) or government– no stock options if you are a public defender, sadly.
We are lucky. I have cousins in Europe where the University one attends (predicated on high stakes early testing) truly is determinative of where you land in life. There are alternative pathways — but they are by no means guaranteed. I don’t shed tears (and I don’t think you do either) for the kid who ends up at University of Vermont, the best public option, because Dartmouth was too expensive. And we don’t live in a country where law schools, med schools, business schools etc. put the Vermont kid aside hoping for yet another Dartmouth grad to fill the class.
Low and middle income families are making this choice about every single purchase they make. And, in most cases, many of those families are still paying a bigger percentage of their incomes towards higher education than ‘donut hole’ or high income/don’t wanna pay families are.
@CFP 100% what you said, and if low/middle income families of T30 LACs are in fact paying more, then there are a number of high school counselors out there who really need to explain their process.
Do you know any actual low income families? Your post is tone deaf in the extreme. I will suggest to them that while they stand on line at the local food pantry, or frantically call their social worker because their SNAP card didn’t load this month, that they spend some time contemplating whether or not Middlebury is “worth” it.
I feel like we need to get realistic with numbers here.
There is something called the standard Institutional Methodology, and the way it works is basically after subtracting out taxes and a form of standard deduction, there is a progressive rate for assessable income that starts at 22% and goes up to 46%. With assessable assets (which excludes things like retirement accounts), there are again some deductions and then a progressive rate of 3% to 5%.
OK, so in terms of assets, the maximum marginal rate is only 5%. This is barely above the a reasonable estimate of what you can get in return with very low risk investments. If you have to pay taxes on that it will be more (have we mentioned 529s?), but still, these formulas do not expect you to give up all your savings.
OK, so we saw what happened with AGI and Middlebury. I was assuming $400K AGI, $300K post-tax, $94K/$300K is about 31%. This is what happens when your post-tax income is well into the range where the higher marginal rates are kicking in, but it is not the full 46%.
But if your income is much lower than that, you would need assessable assets to explain a lack of aid. And that is going to be assessed at most around 5%.
So at $300K AGI, assumed $225K post-tax, I was getting a $34K grant from Middlebury. To wipe this out, I should need at least $680K in assessable assets.
As it turns out, just putting it into the cash line item, I need to get to about $800K in cash to wipe out the aid, which again is because there is a deduction and then it doesn’t start at 5%, 5% is just the top marginal rate.
OK, so, you have $300K in AGI and $800K in liquid non-retirement financial accounts, and Middlebury (barely) expects you to be full pay. They basically expect you to contribute around $60K of income annually, which by hypothesis leaves you like another $165K for spending on yourselves, and $34K from the financial savings annually–which you can basically cover just with interest on the $800K.
So, um . . . can’t pay? Or don’t want to?
Edit: Oh, the IM also discounts for multiple kids, but it is complicated so we probably should avoid that complication unless people really want to go through it.
most students don’t have access to a dedicated student counselor
social emotional counselors who are doing double duty as a college counselor often have a very limited understanding of financial aid.
some schools with dedicated college counselors, including my kids’ affluent public, have a policy to not discuss financials with families. Can they tell you deadlines for FAFSA and CSS and show you resources such as loan payback calculators? Sure. Sort thru financial aid offers and see how those compares to a family’s income/budget? Completely off the table and just not allowed.
I am very proud of the kid who went to UVM, with merit aid, got a great education, moved west (which from Vermont leaves a lot of choices), established residency, and went to a great DVM program with in-state pricing. UVM provided a great education and prepared her very well for everything that came next. If UVM had not been there or had not offered merit aid, then U.Mass or UNH or U.Maine would also have been a very good choice, as would at least 100 other schools.
To me it is clear that donut hole families are excluded from some highly ranked universities, and that there are a lot of academically very strong students in these donut hole families. However, I do not think that the kids are suffering as a result.
From one perspective this might be a case of teaching kids a very valuable lesson early in their life: We all need to make affordable choices.
And perhaps we are all a bit spoiled in that there are so many very good colleges and universities in the USA.
Here’s the tone deaf part. The kid needs to get from Point A to rural Vermont. That’s not a zero cost. The kid needs even the barebones basics to outfit a dorm room. That’s not zero cost. Etc. Which is why I asked if you know any low income people. An increase in electricity rates can be a crisis. They aren’t somehow seeing the bounty of free tuition at Middlebury in precisely the way you want them to. That’s what it means to be low income.
If your point is that it’s better to be poor than to be middle class or affluent- go for it.
Speaking as a parent of a middle-income family who has gone through the financial aid process at similar colleges, I am quite sure that you are wrong. Most (though not all) colleges like Middlebury do have an expected family contribution even for pell-eligible students. While that contribution was not much compared to 90K, a single year’s contribution was more than I have in my checking account& savings account combined.
I am trying to be sensitive to your concerns, but as I think you know when @beebee3 said the quote below, she was talking about non-educational expenses. For example, choosing whether or not your kid should get braces or live with crooked teeth. Or choosing whether your kid will get any new clothing for the school year vs. only wearing their older sibling’s handmedowns. Or choosing to live in an apartment where your kids share a room and the whole family uses one bathroom instead a large or mid-sized house with two. These are trade-offs that we all make. And that is OK. I feel fortunate that I can make those choices when many low income people don’t even have the choice.
I guess what I am asking is how exactly are we drawing the line between these two categories?
Again we have roughed out a couple scenarios now with the Middlebury NPC, which seems pretty consistent with the standard IM at least in these highly simplified hypotheticals.
I think one valid perspective is that these scenarios–$400K in AGI, or $300K in AGI and $800K in liquid non-retirement financial assets–look like they should be treated as the sort of wealthy families who can in fact comfortably afford this cost. Obviously it is a cost, but they should have plenty of income from a combination of labor income and investment returns to really not have to reduce their net worth much at all. In that sense it is basically a couple parents spending about the same on themselves each as they are spending on the kid going to school. Heck, they could all just go to Middlebury together! Sounds nice.
I think the other issue is even once you start getting aid, it is not like these tradeoffs disappear. A $300K AGI household with no assessable assets still has to come up with $60K, after the $34K grant. If the $94K for the $300K AGI household with $800K in cash is material, why isn’t the $60K to the $300K AGI household without the $800K? Again considering that the $800K will nearly cover that $34K difference just with interest, that doesn’t seem to me like a notable line being crossed that disfavors the household with the cash.