Parents giving up legal rights to their children to get more financial aid exposes deep flaws in U.S. college system
Just months after the college admissions scandal, more evidence has surfaced of the lengths well-off parents will go to get ahead in the college process.
Dozens of parents in the suburbs of Chicago transferred guardianship of their high-school-age children to relatives or friends and then used the new legal status to declare their children as independent for purposes of qualifying for federal, state and institutional financial aid, according to reports ProPublica and The Wall Street Journal published this week.
The parents are doctors, lawyers, insurance and real estate agents and in some cases have valuable homes and household incomes topping $250,000, according to the reports. And they went through the guardianship process on the advice of a college counseling firm and with help from lawyers, the reports suggest.
The alleged scheme hinges on the students appearing to live independently from their parents for purposes of financial aid. Because they don’t have access to help from their parents to pay for college, independent students typically qualify for more financial aid than those who are dependent, or teenagers who go directly to college from their parents’ homes. One of the ways to become independent in the eyes of the financial aid formula is by legally changing a child’s guardian.
This behavior and the infrastructure surrounding it is certainly unethical — by portraying themselves as less well-off than they actually are, these families may have captured financial aid at the expense of needier students. The strategy is perfectly legal under financial aid regulations, but it exploits a loophole that’s generally meant for less-advantaged students. The Department of Education is looking into the practice, the Journal reported. The DOE did not respond to a request for comment from MarketWatch.
The tactic is also a symptom of the pressure college costs are placing on even middle and even upper-middle class families (let alone families with fewer resources) and the byzantine system involved in getting help paying for school, experts say.
‘An overly complex system will always promote gamesmanship. Bad on them, but bad on us too.’
“We need to keep our focus on the fact that what has motivated this terrible behavior is that we have an incredibly high cost of college and a Rube Goldberg system for financing it that enables manipulation of this kind,” said Caitlin Zaloom, author of the forthcoming “Indebted: How Families Make College Work at Any Cost.” “An overly complex system will always promote gamesmanship. Bad on them, but bad on us too.”
Families have long been looking for ways to maximize their financial aid
And indeed, the idea of maximizing the amount of aid a family will receive paying for college is so accepted in our culture that there’s an entire industry of consultants, authors and personal finance resources that offer advice to families on how to do it.
Of course, none of the strategies advocated by legitimate experts are as extreme as giving up legal responsibility for a child — though multiple experts who spoke to MarketWatch said they’ve been asked by families whether it’s possible to declare their child as independent for the purposes of financial aid.
But while Andy Lockwood, a Long Island-based financial aid and college consultant, said the guardianship maneuver described in the reports makes him “feel icky,” he also believes, “it’s a close cousin to the legitimate strategies that we recommend on a daily basis.”
In some cases, that could include a tactic like moving money out of an account or asset that would count against a student for financial aid calculations — basically anything except a retirement account — to one that wouldn’t, like an insurance or annuity product.
“There are always lines to be drawn,” said Anna Ivey, a college and law school admissions consultant. “There’s a difference between tax evasion and tax avoidance. This is another bureaucracy where people are constantly trying to walk that line or crossing it.”
‘There’s a difference between tax evasion and tax avoidance. This is another bureaucracy where people are constantly trying to walk that line or crossing it.’
And the people most likely to know how to navigate that system to their advantage are those with resources and experience with the college process — not necessarily the students and families who need the help the most.
As an example, Ivey pointed to an aspect of Illinois financial aid system that meant this fraudulent behavior likely directly impacted other students: the state is one of several that awards money on a first-come, first-serve basis.
“That really benefits people who have know-how and savvy,” Ivey said. “Arguably the people who need financial aid most might not understand the first-come, first-serve aspect of it.”
The cost of college has skyrocketed
Part of the reason why families may be motivated to go to extreme lengths to maximize their college aid is because the cost of school is so high that it even burdens families with six-figure incomes. Over the past 30 years, the average cost of tuition and fees at a four-year public college has tripled, according to the College Board.
Perhaps one of the clearest indications of the challenges families face affording school is that students from households earning above six-figures receive extremely discounted or even free tuition at some elite colleges.
“The high cost of college makes people even who have substantial resources feel insecure,” Zaloom said. “It means that they have to redirect money that they would otherwise put towards say, parents’ long-term retirement, towards children’s education.”
Families’ desire to send their kids to a particular type of college also fuels this anxiety, said Eva Dodds, an independent college counselor in the Detroit-metro area affiliated with Collegewise.
“It’s an extreme example of parents being frustrated by the price tag of quote un-quote name universities,” Dodd said. “You have to figure out how to get $70,000 after taxes if your child wants to go to the flagship public institution out of state or the Ivy League.”
Behavior of a few will likely impact many, including those who need the most help paying for college
Of course, it’s a small subset of the American public and even college-going population that’s concerned with students attending a particular school at the right price. An even more miniscule slice would go to the lengths of transferring legal control of their children to access it. For the vast majority of students, the decision of where to attend college is typically driven by factors like a school’s location and whether they can afford the so-called sticker price — or the cost published by the college, which doesn’t take any financial aid into account.
But the nefarious behavior from this small cadre of families will likely impact a much wider group. If colleges and the government begin investigating more thoroughly students who claim to be independent from their families, it’s going to make it more difficult for students who are legitimately independent to qualify for aid, said Mark Kantrowitz, the publisher of SavingforCollege.com
“There’s a lot of evidence that the more complicated you make the process, the less likely these students are to complete it,” Kantrowitz said. Already, the government flags some financial aid applicants in a process called verification, asking them to take steps to document some of the information they’ve provided in the application.
“There are a lot of students who file for financial aid and they stop in the middle of verification because just how many times do they have to prove that they’re poor?” he said.