Saving money for college is more than sticking money in an account and hoping it will be enough. That simply will not suffice in today’s environment. The average cost of college tuition per year, as of 2014, is more than $9,000 and $31,000 for public and private universities, respectively.
For most families, that is a lot of money. As such, there needs to be an idea in place to cover those expenses as effectively as possible. In many cases it may involve a 529 plan, though that may only scratch the surface. (For related reading, see: Life Insurance vs. a 529 Plan.)
Develop a Blueprint
As a financial advisor, you help clients develop a plan for their investments. This is a well drawn-out plan to manage retirement and estate wishes. The same detail is necessary when helping clients plan for college. Ask yourself some of the following questions:
- Where will the student go to college?
- What kind of degree programs will he or she pursue?
- What will the spending needs be in college?
- What role will tax planning play in saving for college?
- Will other family members play a role in saving for college?
These are just a few of the questions you can pose to clients. Their answers will provide the information you need to deliver actionable steps they can take to reach their goal of saving for college successfully.
“Financial advisors can break the goal down into yearly and monthly goals with strategies to increase the student's chances of receiving financial aid in addition to putting money away in investment accounts, etc." said Ashley Hill, CEO of College Prep Ready.
These tangible goals will help clients be more informed of what is needed to best prepare financially for their child(ren) to attend college. Don’t just look at the abilities of the client when drawing up a plan. If there are grandparents or other family members who want to provide funds, you can include them in the college saving plan — or you can draw up a separate plan altogether. (For related reading, see: Are 529 Savings Plans Right for You?)
More Savings Options
The 529 plan is one of the more popular college savings vehicles available, thanks in large part to the higher contribution limits those state plans provide. The 529 plan is only one option, however. There are many other options to consider for college savings. Some of those options include:
The inclusion of a Roth IRA in saving for college is a bit innovative, only because it’s often viewed solely as a retirement planning tool. According to Matt Cosgriff, CFP, of Lifewise Advisors, “One commonly overlooked vehicle for saving for retirement is the beloved Roth IRA. People love the benefits of a Roth IRA for retirement savings, but few understand how this vehicle can potentially be used as a college savings tool.”
While a Roth IRA is limited by the $5,500 annual contribution limit, Cosgriff points out that it can be a solid option to consider if parents are uncertain if their children will attend college. “A Roth IRA distribution does not incur the 10% penalty usually associated with taking money out of an IRA early if the funds are being used to pay for qualified education expenses,” said Cosgriff. That makes a Roth IRA a suitable option in certain circumstances.
This underscores the point not to overlook an option when working with a client; rather everything should be looked at to find the best plan of attack for each client.
Think Far, Far Ahead
A key part of a college savings plan is to involve the child(ren), especially as they enter high school and start thinking through what they want to do in life. They may not want to attend college, choosing instead to pursue a trade. These realities highlight the need to involve children in whatever strategy seems right for them to save for future education.
Such involvement has two direct benefits. First, the child will grow in financial literacy by having the opportunity to think through the immediate impact such a major financial decision.
Secondly, you as an advisor benefit by having the opportunity to bring in younger generations as future clients. Your active participation in planning for college funding communicates value and establishes a relationship that the child can use after graduation and later in life as his or her own financial goals develop.
The Bottom Line
Planning for college rarely involves covering one need. It often requires balancing multiple needs and possibilities. With a well thought-out plan, you can help clients be more successful in saving for whatever education expenses ultimately come their way. (For related reading, see: A 529 Plan Fit for an Ivy League Education.)