Paying for college and saving for retirement don’t have to be mutually exclusive.
To pay for my child’s college education or keep saving for retirement?
For some of your clients, this is much more than a simple tradeoff. It’s a dilemma.
Either they financially sacrifice their retirement savings and quality of life to pay for their children’s education or they make financial concessions and sacrifice the quality of education that’s available. Or they make too much money to qualify for financial aid, but not enough to pay for four years of college for each child.
As Roger Lorelle, president of Collegiate Funding Solutions, wrote in this post, parents want to provide for children’s college education. “To many parents, it is a deeply 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. They want happy, successful children, but they’re feeling the squeeze of paying for college while keeping retirement planning on track.”[1]
The key to getting more clarity when faced with an “either/or dilemma” is to generate alternative options that lead toward solutions outside of either A not B, or B not A. Clients in this quandary are looking to you – their advisor – to provide those alternatives.
This requires that you, a dedicated person in your office, or a college-planning specialist you work with in your network are well-versed in how your clients’ college-bound children can qualify for grants, financial aid and scholarships.
Keep in mind that, based on 2015-2016 school-year estimates, the average published in-state price for tuition and fees for four-year public colleges was estimated to be $9,410 per year. But the average net price — what the average family really paid — was just $3,980 per year. For private nonprofit four-year colleges, the average published price was estimated to be $32,410 per year, but the average family paid just $14,890 annually, according to the College Board.[2]
Why? The net price is a college’s sticker price for tuition and fees minus the grants, scholarships, and education tax benefits your client receives. In the 2014-2015 school year, postsecondary students received a total of $123.8 billion in scholarships and grants – with about 37% of this free money coming from the federal government, according to the College Board.
To qualify, your client will have to fill out the FAFSA (Free Application for Federal Student Aid). This form is then used by the federal government to determine your client’s Expected Family Contribution (EFC). Since the financial aid packages that schools award to students is based on your client’s EFC, reducing it qualities for more aid, grants and scholarships. As an advisor, then, the main benefit you can offer clients in terms of qualifying for more free money to pay for their children’s education is by identifying ways to reduce their EFC.
Don’t Wait
You won’t want to wait to speak with your clients about college funding. That’s because, as Fidelity Investments points out, a 5-year old is only 13 years away from his or her first year of college. That might be a much shorter time horizon for your clients who may still have 20 or more years until they retire.[3] This is or will become increasingly important if you expect your practice to grow organically by working with Generation Y clients.
Beyond the shorter savings time horizon, there’s also the compressed timing schedule of the admissions process – so clients need your guidance and financial planning help now. Establishing yourself in your community as an advisor who can solve this problem for clients and prospects will surely lead to more referrals.
And as mentioned above, you can become the expert, higher a specialist in your firm or coordinate with a college planning specialist in your area – much like you do with estate tax and accounting specialists.
Using Life Insurance to Pay Some of the Costs
When it comes to paying for your child’s education, there are several options. These include 529 savings plans, Coverdell Education Savings Accounts, Roth IRAs, and life insurance, including indexed universal life (IUL).
In addition to help paying the costs of a college education, an IUL policy also allows a student to qualify for more grants and aid. That’s because cash value life insurance isn’t one of the assets counted on the FASFA financial aid form.
In contrast, 529 plans – tax-deferred college savings plans – generally count as an asset on the FAFSA. And if the money isn’t used for qualified higher education expenses, earnings are subject to federal income taxes. A federal penalty tax and possibly state and local taxes may also be added. If the beneficiary does get a scholarship, that amount may be withdrawn without the penalty but is still subject to other applicable taxes, including federal income tax.[4]
With IUL, the policy is funded through graduation with premium payments and the tax-free growth of the cash value can be used for college expenses, among other things. Once the IUL policy’s premiums are fully paid the policy becomes a tax-efficient retirement vehicle.
[1] “The Changing College Planning Paradigm: Implications and Opportunities for Financial Advisors,” Roger Lorelle, XY Planning Network, June 5, 2017. http://blog.xyplanningnetwork.com/advisor-blog/the-changing-college-planning-paradigm-implications-and-opportunities-for-financial-advisors (accessed June 7, 2018).
[2] “Focus on Net Price, Not Sticker Price,” The College Board. https://bigfuture.collegeboard.org/pay-for-college/paying-your-share/focus-on-net-price-not-sticker-price (accessed June 8, 2018).
[3] “Thinking about using your retirement savings to pay for college? Think again.” Fidelity Investments. 715628.2.0. https://www.fidelity.com/learning-center/personal-finance/college-planning/using-retirement-savings (accessed June 7, 2018).
[4] “What is a 529 Plan,” Fidelity Investments. 433515.11.2
