We’ve all read about the overwhelming student debt burden carried by young Americans, currently in excess of $1.2 trillion. And everybody knows someone struggling to escape a mountain of student loans.

This is an issue that can affect even high-net-worth clients. Private loans now constitute more than 20% of all student loans. Clearly, subsidized federal loans are not meeting the nation’s total need; the significant percentage of private loans suggests that even wealthier families who do not qualify for federal aid may be using higher rate private loans to meet college costs.

In a coffee shop recently, I overheard a woman fretting about how her family was going to pay for her son to attend an elite college. Sitting with what appeared to be an unsympathetic friend, she described a lifestyle of never worrying about expenses; she’d figured they’d just write a check to pay for college.

The family had spent their son’s high school years preparing to get him accepted to college; she described sports camps, SAT tutors and flying all over the country looking at top schools. Yet it seemed they had never spent any energy on planning and saving for the college costs themselves. Like so many families of means, they just figured everything would work out.

REALITY CHECK

But there was a problem. While her strategy of funding college out of cash flow might have worked a decade earlier, her husband had been laid off during the recession and their investments suffered at the same time.

They tapped money she said they had “mentally set aside for college” for a myriad other reasons.

Their solution, because they would not qualify for federal financial aid, was to have their son take out a loan — “maybe just for this year.”

As an advisor, this worries me. If the husband doesn’t find work, that one loan could turn into four years of loans — even more if their son doesn’t graduate in four years or decides to attend graduate school. It’s not too difficult to imagine this young man as one of the majority of college graduates who are in debt for their education.

In 2013, about seven in 10 graduating seniors at public and private nonprofit colleges had student loans, according to a report from the Project on Student Debt. Nationally, the average debt for these graduates was $28,400.

Just under $30,000 may not seem like a lot to handle. Yet student debt weighs heavily on young college graduates. According to one recent survey, for instance:

  • 27% of those young grads said it was difficult to buy daily necessities.
  • 63% felt unable to make larger purchases such as a car.
  • 73% have put off saving for retirement or other investments.
  • 75% said debt was preventing them from purchasing a home.

These college grads aren’t living the lives they thought they would. Their financial burdens, they said, are putting a strain on their career choices, entrepreneurial ambitions and decisions to get married or start a family.
The most telling observation from the report should shake us to the core. “Student loans were created to be an engine for social mobility, but they are, in fact, limiting young people’s ability to achieve financial success.”

TALK TO FAMILIES

The truth is that even for affluent families, high college costs — increasing at greater than the rate of inflation — can become a surprising burden. Federal and state governments seem unable to provide additional funding.

Even clients who have older children may get asked for help; I have one client in her early 80s who educated her three children — one through graduate school — and is now contributing fairly significantly to the college education of her two grandchildren.

So how can we ensure that families plan more for college and that, if students must borrow, that they understand the implications of student debt and are equipped to manage it without sacrificing their dreams?

I discuss and actively plan for college funding with all my clients, regardless of net worth. Here are a few things I advise families to do.

5 KEY ISSUES

  • Get real about cash flow. It’s one thing to say you can just write a check to pay for college. It’s quite another to fully understand just how much those checks will amount to. Encourage clients to consider that their children’s college years may come during an economic downturn, or a period when somebody in the household is unemployed. Doing some math helps: If the college costs $50,000 a year now, what will it cost in 15 years when their child (or, for that matter, a grandchild) is ready to attend? Given the client’s tax bracket, what do they need to earn in order to have $50,000 on hand for college? Often these simple calculations give clients pause and inspire them to begin putting money away in advance. 
  • Think of college as an investment. I ask all families to consider this question: What is it that stops us from evaluating the cost of a college education the same way we would a home or a new car? On college tours, I’ve seen parents hesitate when they ask about the cost, as if the question implies they can’t afford it, or that their son or daughter is not worthy of acceptance. Is it that education is such a noble endeavor that we should be ready to pay no matter what it costs? Either way, that’s not a healthy attitude that supports a wise investment.
  • Save smarter. Why wouldn’t you advise clients to save in a tax-advantaged account like the 529 college savings plan, where assets grow tax-deferred and qualified distributions are tax-free? If your clients leave their college money in a plain-vanilla savings or brokerage account, they’ll pay ordinary income tax, plus (for many wealthy families) the 3.8% Medicare surtax on interest. Often I hear wealthy clients tell me, “We don’t need to save in a 529” — but the tax advantages are actually greater for clients in higher brackets. For practical reasons, it can also be beneficial to keep the college money in the college bucket — not in an account that clients can easily tap for other expenses or extravagances with the promise that they will pay it back.
  • Decide whether children should have skin in the game. I’m stunned that many parents wait until their child’s senior year in high school to tell them they are going to be responsible for a portion of their college costs. If the students knew sooner, they might have made different choices — worked during the school year, looked for a better-paying summer job or saved some of those birthday checks from grandma. As a result, teens learn at the last minute, and when they don’t have the money, they take out a loan. 
  • Talk it out. Many parents feel their teenage children routinely tune them out and ignore their advice; the fact that financial conversations can make a difference can come as a surprise. 

T. Rowe Price found that 58% of kids whose parents frequently talk to them about saving for college say they are saving for college on their own, as opposed to 23% of kids whose parents do not frequently discuss college savings. The same study found 81% of kids whose parents frequently talk to them about investing say they are saving for college on their own, as opposed to just 25% of kids whose parents do not frequently talk about investments. Those are certainly conversations advisors can help with — by either hosting seminars for clients and their children, or providing parents with materials and resources.
The bottom line is we have to do a better job for our children. I know I’ve quoted a lot of statistics, but let me add just one more — a very troubling finding that student loan debt negatively colors the way graduates regard a college education. Just 66% of college graduates surveyed considered college to have been a worthy investment — sharply below the 89% of current college students who think it’s a smart bet, according to a recent Citizens Financial Group study. And more than three-quarters of former college students wish they had a do over for their student loans and were unaware they could refinance.

Remember: We can help with this. Even if you’ve never discussed college funding with clients, it’s time to ask. They’ll be glad you did.

Kimberly Foss, CFP, CPWA, is a Financial Planning columnist and the founder and president of Empyrion Wealth Management in Roseville, Calif., and New York. Follow her on Twitter at @KimberlyFossCFP.

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