Last month we looked at three brutal truths about college costs and their impact on families as well as the inherent implications and opportunities for financial advisors. With the fall semester starting and students returning to college campuses across the country, we felt as though now would be a good time to continue the conversation. To review my last installment on the eMoney blog:
- Truth # 1 – College costs are absurdly high and the projections aren’t encouraging
- Truth #2 – The impact on families is seen in the gigantic amount of student loan debt incurred
- Truth #3 – Upper-middle-income families are the ones suffering the most
To many parents, helping to pay for their children’s college education is a deeply held emotional need, which means that when the time comes and it’s a question of saving for retirement or helping pay college costs, the more emotional and urgent need of college funding supersedes retirement savings decisions.
Because many parents now have the seeming impossible double burden of paying for college while saving for retirement, they expect – rightly so! – more than just college savings strategies from their advisor. They want their advisor to help them identify ways to reduce their out-of-pocket college costs without crippling their retirement savings outlook.
Advisors today who have the specialized capability to provide college savings strategies/plans AND college cost reduction strategies have a tremendous opportunity to differentiate themselves from other advisors, deepen the client relationship, generate more revenue and identify other opportunities with the client.
Beyond these, many advisors have a personal stake in helping clients avoid transferring tens and possibly hundreds of thousands of dollars of assets under management to cover college costs.
eMoney advisors are known for delivering comprehensive financial solutions. In order to further expand the financial solutions and services offered and to better meet the needs of clients with college-bound children (as well as capitalize on the aforementioned advisor opportunities), there are a number of areas where a knowledgeable eMoney advisor can offer significantly more value. Here are four of the most valuable and practical:
- Expected Family Contribution (EFC) analysis – The EFC is the basic starting point to being able to offer value-added college planning services to a family. The EFC is what the family will be expected to pay toward the cost of college at a particular school before qualifying for any need-based financial aid from the school. As it relates to need-based financial aid, families fall into one of three categories: they will qualify, they won’t qualify, or they could qualify (see item #2). Many families making in excess of $150,000/year qualify for need-based financial aid depending on many variables (cost of the school, number of children in college at the same time, etc.). Because need-based financial aid can significantly reduce the out-of-pocket college costs for middle and upper-middle-income families, at a minimum you should be able to estimate your clients’ EFC and help ensure that they can at least cover that amount. Tip – www.collegeboard.org provides an EFC calculator that you can use to estimate your client’s EFC
- Strategies for increasing financial aid eligibility – If you and your clients don’t know how financial need is determined and if you don’t know the difference between “included income and assets” and “non-reportable income and assets” for purposes of filling out financial aid forms –you should—because where they keep their money matters. If they don’t know how to legally and ethically position their money properly for purposes of financial aid, they could end up losing thousands in financial aid – and you could end up losing thousands in assets under management! Tip – http://www.finaid.org/fafsa/maximize.phtml provides a basic primer on strategies for increasing financial aid eligibility. Learn these and you’ll already know more than most of your competitors!
- Funding strategies for covering the gap – Most families will either need loans to help cover the total cost of college or should at least consider them for a variety of reasons. Knowing which options to choose –based on circumstances—should be complicated and confusing. Choosing the wrong option can cost families thousands of additional dollars on out-of-pocket college costs! The knowledgeable advisor should have a basic understanding of the federal loan programs as well as the pros/cons of each so as to be able to offer some guidance to the client for choosing the best option for their circumstances. Tip – If parents take out a PLUS loan to help cover the gap, they can defer the repayment (interest and principal) until after the college years. If their income qualifies them for the student loan interest deduction, paying at least the interest during the college years may be a prudent strategy as they’ll significantly offset the real cost of the loan. It may make good sense to use the deferral period to maximize retirement account contributions – especially if there is an employer match that is not being fully realized!
- Planning for business owners – Most advisors consider business owners to be highly desirable clients. There are many college planning strategies specific to business owners that can help them reduce their college costs significantly either through financial aid-enhancing strategies or strategies that are unique to business owners that can help increase cash flow or tax savings. What makes business owners the best candidates for college planning help is their unique ability to control their circumstances, including income, which is the primary driver of the EFC, versus W2 employees. Tip – IRS 970, Tax Benefits for Education, is a good resource for learning some of the tax-planning options available to families in general and business owners in particular, like the Employer Provided Educational Assistance that may offer significant tax and college cost savings benefits to small, closely-held businesses. The National College Advocacy Group (www.ncagonline.org) provides an inexpensive and go-at-your-own-pace continuing education opportunity for interested advisors.
Next month we’ll look at another area that deserves its own spotlight – How to help your clients who are grandparents that will be helping fund their grandchildren’s college education. Tip – For families that are, or could be, candidates for financial aid, the most common strategies that grandparents use to help fund college costs can be disastrous for the family’s financial aid eligibility! We’ll cover them and suggest a way that you can use the “insider information” to create great value for the family and develop a new personal and business relationship with the next generation where one may not already exist!
