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                                                                                EDUCATION, Page 60

The Tuition Game


Advisers offer perplexed parents clever college-aid schemes.
But where's the line between working the system -- and cheating
it?

By RICHARD N. OSTLING -- With reporting by Sophfronia Scott
Gregory/New York and Lisa H. Towle/Raleigh, with other bureaus


    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."