Legg Mason's 2012 Intergenerational Survey of College Finances points out a lack of advanced planning among affluent Americans for their children's college education. The study looked at college funding and planning among three groups of parents with investable assets of $250,000 or more: those with children who have already graduated, those with children currently enrolled, and those who are planning to send their children to college.
Altogether, a vast majority of surveyed parents used or plan to use their current income or withdraw from other savings and investment accounts to pay for college. "The lack of strategic planning regarding college savings (including under-estimating total college expenses, starting the process too late, and failing to utilize or maximize appropriate investment vehicles such as 529s) provides a unique opportunity for financial planners," said John Kenney, head of Legg Mason Global Asset Allocation.
Kenney went on to say that advisors are likely to find that clients are grateful for help in developing a college savings plan that includes systematic investing in a tax-advantaged vehicle such as a 529 plan. "Including college savings in the financial planning discussion aligns the FA with the client's needs and, in doing so, positions both the client and the FA for greater success," Kenney asserted.
In essence, the Legg Mason survey found a lack of advanced or strategic planning. Specifically, the firm found these shortcomings:
- Underestimating the extent of total expenses
- Starting the planning process too late
- Ineffective use of appropriate investment vehicles
- Inadequate level of guidance from financial advisors
- Reliance on funds coming from other sources such as scholarships and even grandparents.
Parents of youngsters also relied on their own assets, including those not dedicated for higher education. The survey found that 83% of affluent parents in the college planning stage said they expected to use current income for college funding; 79% said they'd tap 529 plans; 65% would withdraw from their savings and investment accounts. As the numbers indicate, the surveyed parents in this college planning stage generally anticipate using multiple sources of cash to pay what could be six-figure higher education bills.
Parents with pre-college kids also may have plans to use student loans (40% of respondents in this category), their kids' custodial accounts (28%); Coverdell plans (7%); parents' retirement accounts (7%); and home equity loans (6%).
The prevalent use of current income shows that affluent parents are leaving money on the table by not using tax-advantaged savings programs, as Legg Mason puts it. "Unfortunately, many parents, regardless of wealth and income, fund college expenses via current income or investment and savings accounts not specifically targeted to college savings," Kenney said in a statement.
By beginning the college savings process earlier, parents can take greater advantage of the tax savings afforded by 529 plans and potentially free up other assets to fund their own retirement goals, Kenney added. Legg Mason manages the Scholars Choice 529 plan, Colorado's advisor-sold plan.
"Even affluent families under-fund their children's college savings, despite having resources to make additional savings," Kenney said. Many parents who realize they should be saving more admitted they either did not know how much they needed to save or did not expect expenses to be so high, which indicates there is an opportunity to provide parents with more education and guidance about putting together a coordinated plan.