Johns Hopkins Magazine -- September 1998
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Student aid
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Paying for college
Saving for college
Parents who save

T U I T I O N    S P E C I A L    R E P O R T

Do Parents Who Save Get Penalized?

If Ellen Frishberg could send just one message to parents of future college students, it would be save, save, save. "Whenever a grandparent gives a gift of a check to my children, we put it in the college fund," says Hopkins's director of Student Financial Services, who is the mother of two grade schoolers.

Many middle income parents neglect to save for the college education of their children because the event seems so far off. Or because they think having savings will reduce their chances of receiving financial aid. Dangerous thinking, declares Frishberg, who refers to such parents as "the planning impaired."

To allow Frishberg to illustrate why savings are so important, we invented three families: the Spendthrift Smiths, the Moderate Millers, and the Frugal Foxes. All three families are identical in every way except for the amount they have saved. Each of our fictional families has a child who applied to Hopkins and filed an application for financial aid last year. The total before-tax income for each family last year was $82,000. The families each own a home valued at $250,000, and owe $112,000 on their mortgage. The older parent in each family is 48. The difference is that the Spendthrift Smiths have saved only $10,000 while the Moderate Millers saved $25,000, and the Frugal Foxes squirreled away $50,000.

Frishberg then ran these numbers through her formula and determined the financial aid package that Hopkins would design for each student:

Spendthrift Smiths ($10,000 saved)
Direct loan: $2,625
Federal work study: 2,000
Hopkins grant: 7,700
Student summer savings: 1,400
Contribution needed from parents: 18,242
Moderate Millers ($25,000 saved)
Direct loan: 2,625
Federal work study: 2,000
Hopkins grant: 7,300
Student summer savings: 1,400
Contribution needed from parents: 19,088
Frugal Foxes ($50,000 saved)
Direct loan: 2,625
Federal work study: 2,000
Hopkins grant: 5,900
Student summer savings: 1,400
Contribution needed from parents: 20,498

At first glance, you might conclude that the Smiths, with less money in the bank, come out ahead. Indeed, they do receive the largest Hopkins grant--$7,700--while the Frugal Foxes get only $5,900. But look closer.

The expected parent contribution is nearly the same for all three families, despite the big difference in their savings. But even if the Smiths deplete their savings, they will still owe $8,242, which they will have to borrow or pay out of their income. And that is just for the first year. Do the math, and you'll see that the Smiths will have to borrow a total of $62,968 for all four years at Hopkins (assuming their financial aid package remains the same for each year). The Foxes will have to borrow more as well, but only $31,992--half of what the Smiths will incur. For the Smiths, the loan burden might prove insurmountable. At the very least, it could put a serious crimp in their standard of living at a time when many parents are nearing retirement.