Like a swollen, flooding river, the costs of college keep rising. The average four-year public university bill was roughly $80,000 for a four-year degree for in-state students (as of the 2014-15 academic year), according to the College Board. For private four-year colleges, the average four-year tab averages $168,000; tuition and fees at these schools alone have climbed 169% since 1985.
While the cost of higher education creates a social burden, it also seeds a financial planning opportunity. Advisors can play an instrumental role in guiding their clients through the college-planning maze by combining their expertise in retirement, tax and portfolio management with college planning advice. This guidance is especially important as many families go into debt to pay for school.
‘AN EMOTIONAL PURCHASE’
Dave Emery, a CFP with the Marshall Financial Group in Doylestown, Pa., began to offer college planning as a specialty in 2006 when his children were in middle school and he saw higher education expenses looming, a prospect that spooks countless American parents.
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“Many planners are not addressing the full impact of college costs,” Emery says. “College is an emotional purchase.”
Emery says he helps clients consider the impact of college debt on their overall financial plan, as well as assisting them after mistakes have been made. “One client took on $89,000 in college debt for their son, who could only find a part-time job when he graduated. They wanted to know how they could repay the loan.”
One reason planners should beef up their knowledge on college debt planning: counseling from high schools, colleges and the Department of Education is inadequate to non-existent on topics such as aid availability and debt repayment management.
According to a recent survey by the education financial technology firm Iontuition, 75% of students or graduates with loans have not been told about lowering their monthly payments through government repayment options, although more than half qualify.
As I discovered when I researched my book, The Debt-Free Degree, the debt-advice field was filled with disreputable firms that charged fees for filing free government forms. Planners and advisors can help their clients avoid these scams and provide a much more comprehensive service in this area, based on skill sets they already have.
There’s also an opportunity to assist parents in navigating the agonizing financial aid process. The assistance that many colleges ultimately provide — but don’t advertise — can be opaque. Many families think they won’t qualify for aid, so they don’t apply. The paperwork alone can be discouraging.
Although specialized training is available for planners who want to enhance their college planning skills, much of the information they need is publicly available. For example, one essential piece of the college selection process is finding the best fit for clients and their children based on how much merit and need-based aid they are likely to receive from colleges.
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The College Board offers an online net price calculator that shows what colleges are actually charging once all financial assistance is provided. You can also use the Department of Education’s online tool to find the colleges with the lowest net prices and most generous aid offerings.
COLLEGE OR RETIREMENT?
At an even more basic level, planners can provide advice on how to save for college, which is often the least-filled funding bucket after living expenses, taxes and retirement. Should clients forgo retirement savings to tackle more-immediate college bills?
“I recommend to clients with young children that they take care of themselves [first],” notes Theresa Rosen, a CFP with Prudence Financial in Sudbury, Mass. “Student loans aren’t the greatest things, but students can take them out. You can’t borrow for retirement.” Rosen tells clients to max out their retirement plans before considering college savings. Then, they should look at popular college savings vehicles such as 529 savings plans, which are offered by every state.
When it comes to 529 plans, advisors can offer some valuable insights for clients. Which plans are best, based on tax advantages, internal management, diversification, risk and cost? Should clients choose individual mutual funds within a plan or go with an “age-adjusted” program that ratchets down risk the closer the child gets to college? How does saving in a 529 plan impact aid availability?
Planning gets more complicated with families who have set up trusts such as UGMA accounts, which place assets in a child’s name at a certain age. Those vehicles could reduce chances for financial aid.
While advisors can use publicly available tools like savingforcollege.com and Morningstar, which rates the programs annually, they may need some additional expertise to learn how to integrate 529 selection and saving into a comprehensive financial plan.
When advisors add education-expense planning to their practices, it helps to break the down the services involved.
- College positioning. Although this is typically the realm of college-prep counselors, it is also a fertile area for planners. The best students can often qualify for the most merit aid, which is not based on financial need. Planners can help identify colleges that dole out the most merit-based assistance, which, unlike loans, doesn’t have to be paid back.
- Debt management. Even upper-middle-class families are struggling to cover college expenses with loans, which are the second-largest consumer debt — nearly $1.3 trillion — behind mortgages. Advisors can counsel on the number and amount of loans to obtain and on parents co-signing and borrowing against their 401(k)s (a bad idea) or tapping home equity. They can also advise on loan- repayment strategies and assist in consolidation or refinancing of loans.
- Aid positioning. Where assets are located makes a huge difference in how a college assesses a family for need-based aid. Assets in a student’s name, for example, are counted more heavily in aid formulae than parental assets; income and realized capital gains are seen as more accessible for college expenses than retirement funds. A prudent aid-positioning plan can not only help a family qualify for more aid, and it can also bolster retirement savings.
- Comprehensive college and financial planning. This more sophisticated approach involves specialized training and certification. By combining asset management, tax planning and aid positioning, an advisor can provide a client-friendly solution that takes into account clients’ financial goals and needs. One popular route is for the advisor to receive certification through the National Institute of Certified College Planners. This training encompasses aid positioning, tax strategies, debt management and insurance planning.
Any advice provided to clients to ease them through the college-funding maze is valuable. Even better, by offering such assistance, you’ll be helping not only your clients, but also their children, build a more secure financial plan.
John F. Wasik is the author of Keynes’s Way to Wealth and 13 other books. He is also a contributor to The New York Times and Morningstar.com. Follow him on Twitter at @johnwasik.