The earlier clients begin to save for their children’s college education, the less likely a scramble to divert funds will be needed later. There are a number of ways to financially plan for a child’s college education, but it’s important for advisors to make sure parents are aware of all options as early as possible.
Where are they now?
When financially planning for college, it’s important to take note of the client’s current financial position to draw an adequate road map to where they want to be. This is a good time for advisors to be very clear and honest with clients about their current financial situation and what they can do, beginning today, to plan for future college expenses. Encourage clients to do a family balance sheet as a first step. It sounds obvious, but it may surprise advisors how many clients do not have one.
Where do they want to go?
Financial planning of any type is rarely a straight line. Once a family balance sheet is completed, it is a good time to forecast the estimated cost to pay for college. Given tuition increases in recent decades, this can be a great motivator for clients to implement a savings plan. Because this is also an ideal time to discuss vehicles specifically designed to help families pay for college, this conversation can begin by discussing the various 529 plans. These plans, initially developed at the state level, are some of the most popular vehicles used to save for future collegiate expenses. There are two types of 529 plans, also referred to as “qualified tuition plans,” a pre-paid plan and a savings plan. Both of these plans are exempt from federal income taxes.
How do they get there?
The pre-paid 529 plan, currently available in 10 states (FL, IL, MD, MA, MI, NV, PA, TX, VA and WA), allows parents to purchase future tuition credits at today’s rates. These plans are guaranteed to increase in value at the same rate that college expenses increase because performance is tied to tuition inflation, reducing investment risk. This type of plan can be administered by either the state or by a higher education institution. Because the prepaid tuition plan covers tuition costs directly, it makes it an attractive option for parents looking ahead in the states where it is available.
The second 529 option is the savings plan. While prepaid plans lock in tuition rates and are guaranteed to rise in concert with future increases, the savings plans do not lock in rates or provide any guarantee against future tuition increases. These are investment plans and, much like retirement accounts, their value fluctuates based on the investments chosen. This means that the saving plan future value might not be enough to cover all college expenses.
Also similar to retirement accounts, the majority of 529 savings plans offer plenty of investment choices like stocks, bonds, mutual funds and money market accounts. There are also many age-based investments that are managed based on the number of years until a child enrolls in college.
It’s important to note that clients investing into a 529 plan could very well impact their child’s eligibility for grants or student loans. Additionally, annual asset charges for 529 savings plans may be higher than the corresponding share classes of any underlying mutual funds.
What happens if they fall short of their goals?
It is important to discuss with clients the real possibility that all of their planning and savings might still not be enough to fully pay for college. While the prospect of student loan debt is a dark cloud hanging over many students during their college years and, potentially, many years after, the tried-and-true methods of utilizing grants and scholarships can provide a life-line. A prudent financial advisor will assist parents in gathering as much information about any financial benefit a student could be eligible for. It is not well-known that many scholarships are not academically based, nor tied to demographic eligibility requirements. Assisting clients in finding all potential avenues to help pay for college is a wonderful way to build trust and strengthen existing relationships.
Income eligibility grants and scholarships are prized by many parents and potential students, but will oftentimes have quite a lot of competition. Academic scholarships can be earned and athletic scholarships can be awarded, but it is important to stress to clients that these should be considered part of financial planning for college. The safest way to pay for college is to begin saving as soon as possible.
Many parents begin saving for college before a child begins preschool, but for others this is not possible. Perhaps one parent needs to stay home with the children while they are young because of prohibitive daycare expenses. Perhaps one parent loses a job or there is an extended illness in the family. Much like retirement planning, saving for college is a long-term commitment where the path is not always smooth. Prudent financial planning will take into account some of these bumps in the road, but with a strong plan and continued follow-up work by an advisor, it is more likely that that frantic last-minute attempts to pay for college can be avoided.
Talking with clients early, and often, about college savings is an important part of financial planning. Finding a method to save at least some future college expenses as early as possible can also lead to other conversations about other types of financial planning, most notably retirement planning. It can also provide a sense of relief for many parents, hopefully building a strong financial planning relationship for many years to come.