Whenever we work with clients we discuss the “Big Picture.” We want to have a clear understanding of where clients currently stand and where they want to be in the long run. The main components of that “Big Picture” are typically investments, retirement planning, estate planning, taxes, and insurance coverage. Many people walk in the door with some knowledge of each of these components. But what we’ve found interesting is the lack of awareness of the details of their college savings “portfolio.” For some this consists of 529 accounts, but not always.
Because 529 plans are administered by the individual states, the accounts are often held at a different financial institution. As a result, they sometimes become an afterthought. In addition, some families are contributing to these accounts without knowing what they’re investing in, how much it’s costing them, and whether the amount they’re saving is adequate.
This is why some education on college savings can be very valuable. The rules are complex and vary from state to state, and the rules often change. So it pays to be up-to-date for those who have aspirations of paying for a higher education for their children.
Below we’ve provided “course descriptions” on the core classes every family should take when saving for college (think 100 and 200-level courses). Then we describe the “upper level” course descriptions for those seeking to “major” in college savings. (Don’t sweat it too much – they are all Pass/Fail!) We think awareness of these topics serves as the foundation for establishing a savings strategy that makes sense within the “Big Picture” for multi-generational wealth planning.
College Savings – The Intro Courses
Retirement Savings vs. College Savings (SAV 101): This course delves into the trade-off between saving your hard-earned dollars for retirement or for the kids’ college funds. We examine the psychological “guilt trap” some parents find themselves entangled in and assure parents that retirement should be the first priority and college savings second. The rule-of-thumb we typically apply is that kids can usually borrow money to attend college (and use other strategies), but parents can’t borrow for retirement funds.
How Much Should your Child Contribute? (SAV 102): This is a more subjective examination of just how much your children should contribute to their own college funding and touches on goal setting and the personal aspects of parenting. In this course, we describe how it might make more sense for kids to take on some level of debt and even supplement the tuition expense by getting a job before and during their college years. The basic tenet here is ensuring our kids have “skin in the game” and don’t view their time at the university as a four-year (or five, or six) party.
Lowering the “Price” of College (SAV 201): As college costs have skyrocketed in recent years, we need to address ways to lower these costs. This can be done in a variety of ways including taking courses for college credit while still in high school, attending community college for one or two years, taking courses during the summer at community colleges, living at home, etc. In addition, we could be in the early stages of a “game changer” as on-line courses and on-line degrees are becoming more and more prevalent. This could introduce a significant competitive threat to the strangle-hold the ivory tower universities enjoy today.
Fundamentals of 529s (SAV 202): This course walks through the financial aspects of 529s. We describe how 529s are like Roth IRAs for college costs (i.e. after-tax contributions and tax-free growth). In addition, we talk about tax deductibility, portability, and estate-planning implications.
College Savings – The Advanced Courses
529 Investment Options (SAV 301): In this course, we dig into the investment options within 529 plans and how to best utilize these funds. As noted earlier, many families take a “set-it-and-forget-it” approach to saving money for college. However, we would argue these folks are doing themselves a disservice as it relates to asset allocation and investment fees. Specifically, families need to view college savings from a risk-adjusted perspective. By that we mean they might take more risk early on (to try to attain more growth) and less risk as the student approaches college as captured in many “age-based” funds. However, we believe parents might be better served to allocate assets themselves, in-line with broader market conditions. In addition, many funds can charge exorbitant fees, thereby killing future returns. Fortunately, many 529 plans also offer low-cost offerings which almost always should be utilized.
Whole Life Insurance for College Savings? (SAV 401): In this course, we discuss the idea pitched by “college planning” firms of using whole life insurance to save for college. In most cases, whole life insurance policies is not an optimal way to save for college. In this class, we talk about the disadvantages of up-front commissions, on-going fees, limited investment options and inflexibility, which far outweigh the supposed advantages of removing assets from consideration for financial aid. In short, using permanent insurance is usually pitched as an idea to “move assets” outside of consideration for the expected family contribution (EFC) used for financial aid calculations. Said differently, insurance isn’t considered in the balance sheet and a family could qualify for more financial aid. However, we’ve found the EFC impact of assets is limited and is much more heavily weighted toward family income. So while this strategy might work for low-income, high-asset families, for most others it probably doesn’t make sense.
529 Tax Advantages vs. Flexibility – The Account Type Conundrum (SAV 402): As a follow on to the core course Retirement Savings vs. College Savings (SAV 101), this advanced course examines the advantages and disadvantages of going “all-in” with 529 accounts. Specifically, we look at the alternative of taking a measured approach to allocating some percentage of college savings to 529s and some to other investment accounts. With constantly-changing expectations for expenses, can a family really know how much they’ll need for education expenses? And if they don’t know, will they really want to take the risk of “trapping” such a large balance of funds in 529 accounts?
To wrap up: While this curriculum serves as a good start, we all know circumstances change quickly. Circumstances are constantly in flux and the strategy needs to be reviewed on an annual basis. Each child’s status changes through the years (good grades, bad grades, scholarship opportunities, career preferences, etc.). More importantly, the family’s “Big Picture” also has many moving parts (careers, inheritance, etc.) which must be considered. Saving for college is not an isolated financial topic, but a major element to integrate with plans for retirement, cash flow, tax liability, insurance coverage, and estate planning.