The U.S. government continues to support irresponsible behavior. I find the blatant disregard for those that are responsible, do the necessary sacrifices, and plan to be appalling. I shall outline factually how the government continues -- unabated and with no remorse whatsoever -- to support irresponsibility. This, above all else, is what creates in me a high level of angst against our government. But here I am, with my tiny little blog, attempting to make some sense of the how, what, and more importantly the why of the current operations of our governmental systems.
The first area I want to highlight is the financial aid area for higher education. The starting point for every discussion on this topic has to be with the FAFSA (Free Application for Federal Student Aid) form. Stemming from that magnificent piece of bureaucratic Mecca is the Pell Grant. You can read all about the Pell grant here: http://pellgranteligibility.net/ The Pell Grant is based upon a simple formula: Financial Need = Cost of Attending College - Estimated Family Contribution.
I don't have much problem with the parents' calculation of the "Estimated Family Contribution", but the dependent's calculation is horrible. I'll recap that in the next paragraph. The parents' calculation is simple. You make over about 25,000 and roughly 22% above that amount will be held against you. On the asset side of the equation, any amount over $41,300 is held against you at a rate of 12%. Not many people in this income range will have assets (excluding any home equity -- even if that happens to be $1,000,000 btw) over $41,300. Plus, at some point the Pell Grant does have to phase out.
For all of you parents out there that support your child working their way through college and hope to obtain a pell grant, the government punishes you at (in essence) a 50% tax for anything the child earns above about $3,200. Now, I ask -- What kind of incentive is that? Be lazy and you'll get a ton more. Additionally, putting assets in the child's name is equally terrible. Instruct your children to be savers and they're punished at a 20% clip. No buffer. Message from our government -- "Sorry that you've tried to be responsible and save. Go pound salt. We aren't helping you."
In summary, if you have liquid assets of any type funnel all of those into retirement accounts (Roth's being the best vehicle for that -- I'll blog on that later) or paying down your house's mortgage. If you have hard assets, such as a business, vehicles, etc. you have a buffer of $41,300 without any penalty. Beyond that you get hurt at 12% over that number. Putting any assets in the child's name is foolish. There is no buffer. They hold anything against them immediately at a 20% clip. Additionally, if they earn any more than about $3,200 they really hammer you in the EFC calculation at nearly a 50% rate.
Understanding how the government operates in environments such as in the financial aid arena is unfortunately going to become part of your and your child's education in the real world. Better start cracking the books.
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