Paying for the rising costs of college education joins retirement and purchasing a home as one of the top financial concerns facing clients, especially those with young children. According to a 2007 survey by Bankrate.com, 86% of parents with children 18 years old and younger expected their children to go to college, but only 47% believed they could afford it.
Determining how to save for a college education is difficult for most families, because it requires an understanding of inflation, the trajectory of tuition costs, rate-of-return on savings, fluctuation of interest rates to borrow money, and pay-as-you-go models. You can give your clients one more reason to rely on you and your company for financial guidance if you adequately address their college savings goals, understand their personal needs, and stay on top of how changes in college savings plans and tax laws can affect them.
Set Goals and Quantify Needs with Clients
Clients with school-age children tend to be young themselves and have not yet reached their peak earnings years. Contributing to employer retirement plans, coupled with the costs of dependents, makes it is easy for these clients to defer college savings, especially when their children are very young. We know this is a mistake, because it is less expensive to save for college now than to borrow money later. The difficulty can be in convincing clients to make the initial sacrifice. We can help them with this decision by bringing their long-term goals to life.
Using milestones and goals helps clients with significant monthly expenses see the necessity of saving now. You can do this by providing clients with easy-to-understand tables and calculators that show the total costs of borrowing juxtaposed against the powerful force of compound interest in a college savings plan. These illustrations will reinforce that, ultimately, borrowing can be up to three times more expensive than saving. Seeing the numbers in black and white can often convince even the most reluctant client.
You also can help ease the pain of monthly college savings by helping clients determine how much they will need for college. There are some online tools, such as savingforcollege.com, that can help clients gain a stronger grip on the actual cost of a college education. These tools are only a starting point because they often use national averages for costs or fail to calculate inflation rates. Savvy personal planners will provide expert personalized advice derived from the client's individual goals. Helping your clients understand how much they should save, and writing it down for them is critical. This is where your specialized, personal advice will be most useful and where your understanding of your clients' goals is essential.
Some clients are satisfied with saving enough for their children to attend a state university. Look at the inflation rates in your state, and research your state's major universities and colleges to understand how the tuition rates will be affected by inflation, so that you can properly advise your clients on projected costs of a public school. Also, research your state's legislative action associated with college tuition, because some states are putting tuition caps into place for their universities. Others are offering programs in which students can "lock in" today's tuition if they commit to a state school. As an expert financial advisor, you must be up-to-date on all of these local activities that may affect your client's savings goals.
Families who want to develop a college savings plan that covers the expenses of a private or out-of-state university may be initially overwhelmed at the projection you provide. Your role is to help them understand that private school tuition can be within their grasp, especially if you explain the "one-third-rule," in which families save one third of the expected college costs, pay one-third from current income during the college years, and borrow one-third using a combination of parent and student loans.
Looking Ahead -- Another Way To Save for College?
Matching clients' needs to the right plans, now and in the future, builds long-term equity in client-advisor relationships. More than ever before, people are aware of the need to save, but unlike previous generations, today's young parents often work for companies that have no guaranteed retirement plans. Their 401(k) plans are no longer only for retirement luxuries; they are often the only means to retirement. That being said, a recent survey on savingforcollege.com found that 80% of those surveyed would postpone retirement to assure their children attend college.
Because saving for both retirement and college presents a difficult challenge, you should consider offering a flexible solution that allows families to save for both simultaneously through a Roth IRA. It is true that Roth IRAs offer tax-deferred earnings and tax-free qualified distributions when needed, but there have been restrictions that have excluded many from participating. Starting in 2010, the existing $100,000 income criteria for converting a traditional IRA to a Roth IRA will not apply.
With your guidance, families can take advantage of a special rule for conversions that will occur in 2010 and help them integrate their college savings and retirement goals. In that year only, income from a traditional IRA conversion will not be reported in 2010, but will instead be reported and divided equally between 2011 and 2012, unless the client elects to do otherwise.
Many parents with young children will wonder what implications this change in the law will have for them. Using a Roth IRA creates a hybrid college and retirement savings vehicle -- perfect for families with both savings goals. The earnings on the Roth IRA can be withdrawn without penalty when children reach college age. And unlike a 529 plan, if the children receive scholarships or opt out of college, parents retain the money for retirement with no penalty.
It is even conceivable that clients could make nondeductible contributions to their traditional IRAs in 2008 and 2009, and get a jump start on the new law. The entire amount built up prior to 2010 will be available for conversion in that year.
Many families with young children have more immediate priorities than saving for college, but it is still a top concern. Helping clients quantify their needs in real numbers makes saving manageable, because they see their goals in meaningful terms. By introducing new ideas such as the 2010 Roth IRA changes, retirement and savings no longer feel like separate and conflicting goals. Educating your clients about these things ultimately will increase the confidence clients have in turning to you for financial advice.
Herb White, CLU, ChFC, CFP, MBA, founded Life Certain Wealth Strategies in 2003 as an independent, unbiased financial planning firm focused entirely on providing comprehensive solutions for clients' financial challenges and goals. Mr. White led the company's robust growth from its beginning, with only two financial planners, to its full-service capabilities today, with seven advisors and five support personnel. He is a frequent speaker at financial planning seminars and workshops sponsored by employers as well as other organizations throughout the Denver area. He also writes frequent guest columns for the Denver Business Journal.
