Over the last couple years, political upheaval in the United States, the global pandemic, international trade issues and supply chain disruptions have roiled markets. And more recently, geo-political concerns, inflation and the prospect of rising interest rates have also contributed to a higher level of volatility than many investors are comfortable with.
Like many Americans worn down by one crisis after another, your clients may be at a point where a more positive discussion topic would be welcome.
Here is something different, relevant, important and long-range to talk with clients about that may help them take a break from the short-term woes.
April is financial literacy month, a time for people of all ages to brush up on their financial knowledge. And with many students around the country preparing to wind up another school year, this may be an ideal time to talk with clients about their college goals for their children or grandchildren and how they hope to help fund these educational expenses.
Unless your clients’ young scholars are academically or athletically gifted, their post-secondary educations may come with hefty price tags. And that means your clients need to save and invest – early and often – if they want to help their young scholars graduate without college-loan debt.
Just how much could one expect to pay to earn a diploma? Consider this: Based on today’s average costs for college (including tuition, fees, room and board) it’s $109,320 for four years of undergraduate study at an in-state public university and $223,200 at a private school.1
College expenses are increasing considerably faster than the general inflation rate. Indeed, the cost of a four-year education has nearly tripled over the last three decades.2 So your clients with young children may eventually be looking at college bills exponentially higher than those seen today. But for most people, paying for college is money well spent – in fact, over the course of their lifetimes, college graduates earn about $1 million more than students with just a high school diploma, according to a report from Georgetown University.3
In addition to helping their children get the education they need to prepare for a successful career, parents (and grandparents) have another strong incentive to save for college—protecting their children from incurring massive student loan debt.
In 2020, the total student loan debt in America reached $1.53 trillion, making it the second largest debt category in the U.S.4,5 The current average monthly student loan payment is $400 (which is about the price of an Apple Watch) and current estimates hold that the average time to pay off student loan debt is 21.1 years.6,7 As college costs continue to rise, it’s inevitable that graduates’ debt loads will follow.
Here’s what we know: College is really expensive, it’s getting more so every year, and students are taking out large loans. Yet, a college education is still a great investment in a child’s future. So, what can you offer your clients who are determined to help their children or grandchildren get the benefits of a degree?
College funding possibilities
You may already be familiar with the most popular college-savings vehicles, but here are a few highlights that you may find particularly valuable in your preparation for, and conversations with, your clients.
529 plans – Despite the amount of attention they’ve received in recent years, 529 plans are not as popular as you might have expected. In fact, one survey found that only 18 percent of families are using these plans.8 And the families that do use 529 plans are the wealthier ones, with about 25 times more assets than those who don’t use them.9 But 529 plans are readily available to anyone; there’s typically no minimum investment, and investors can automatically contribute quite small amounts each month. Consequently, you’ve got a potentially large market, even apart from your high net worth clients.
And for all your clients, you can stress the key benefits of 529 plans: the tax advantages (i.e., earnings accumulate tax-free when used for qualified higher education expenses, plus state tax credits or deductions); the high contribution limits; the freedom to invest in any state’s plan, the flexibility to switch beneficiaries; and the ability to use 529 plans for virtually any type of higher education, including four-year and two-year colleges and vocational schools.
You might want to remind your clients that a 529 plan can affect their children’s needs-based financial aid—but it might not doom it. As long as the 529 assets are under the parents’ control, they typically will be assessed at a maximum rate of 5.64 percent in determining the families expected contribution under the federal financial aid formula, as opposed to the usual 20 percent rate for assets held in the student’s name. The SECURE Act also allows 529 plan savings to be used to pay student loan debt, up to certain limits.
You also may find that some of your clients want to establish a 529 plan for their grandchildren; although a 529 plan owned by a grandparent won’t be reported as an asset on the Free Application For Federal Student Aid (FAFSA), withdrawals from the plan are treated as untaxed income to the beneficiary (i.e., the grandchild)—and that could have a big impact on financial aid. So, you may want to advise clients with grandchildren to contact a financial aid professional about the potential effects of any gifts they’re considering.
U.S. Savings bonds – Series EE and Series I are virtually risk-free bonds with tax benefits for clients looking for certainty in their investment, although the bonds have a lower rate of return compared to 529s.
To purchase U.S. Savings bonds, the owner must be at least 24 years of age, meaning the bond should be in the parent’s or grandparent’s name. Owners of the bonds who fall within specific gross income ranges are eligible for tax exemptions, when the bonds are used for higher education expenses.
Zero coupon bonds – Those of your clients who prefer a high degree of certainty might be interested in investing in a zero coupon bond that matures just when their child is ready to go to college. Of course, they’ll need to understand that even though they won’t receive regular interest payments throughout the life of their bond, they’ll still be liable for the taxes.
Never too soon to save for school
The college funding possibilities outlined in this article aren’t the only ways to save and invest for college, but they may well be of interest to your clients. Talking with them about strategies to prepare for the high cost of higher education can be an excellent way to demonstrate your commitment to their financial wellbeing. Regardless of what is happening in the economy and markets short-term.