Once again, it’s time for the NCAA men’s and women’s national basketball championships – also known as “March Madness.” Of course, a majority of these players have athletic scholarships. But unless your clients’ children (or grandchildren) are athletically gifted, they may not be so fortunate. And that means your clients need to save and invest – early and often – to eventually help pay those substantial college bills.
Just how hefty will those bills be? Consider this: For the 2018-19 academic year, the average total cost (including tuition, fees, room and board) is $21,370 for in-state students at public four-year college; for four-year private schools, the corresponding expense is $48,510, according to the College Board.1
You can get an even better sense of these costs by checking out the accompanying RBC Correspondent Services “NCAA-themed Tuition Madness” bracket, which shows the estimated four-year price tag for all the schools in this year’s NCAA men’s tournament, many of whom also appear in the women’s competition.
College costs are increasing considerably faster than the general inflation rate, 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.2
In addition to helping their children get the education they need to prepare for a successful career, parents have another strong incentive to save for college – protecting their children from incurring massive student loan debt. Recent graduates owe, on average, more than $37,0003 – and 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:
– 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 just 18 percent of families are using these plans.4 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.5 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% in determining the family’s expected contribution under the federal financial aid formula, as opposed to the usual 20% rate for assets held in the student’s name. 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.
– For a while, many people in our industry thought the Coverdell Educations Savings Account (ESA) would disappear, but it’s still around. As you may know, a Coverdell account is similar to a 529 plan in that earnings and withdrawals are tax-free, provided the money is used for qualified education expenses. However, while anyone can invest in a 529 plan, regardless of income, parents whose modified adjusted gross is over $220,000 (or $110,000 for single filers) cannot contribute to a Coverdell account – and, perhaps more importantly, the maximum contribution amount is just $2000 per year. Plus, a Coverdell ESA operates more like a custodial account, in which the funds are the property of the beneficiary and cannot be revoked. By contrast, a 529 plan owner – not the beneficiary – retains control of the assets over the life of the account.
Nonetheless, a Coverdell account does offer one feature that might appeal to your clients – the ability to self-direct investments. With a 529 plan, families must invest in the portfolios offered by each plan. While this might not be a problem for many people – the 529 portfolios can include age-based options that automatically shift allocations over time as the beneficiary gets closer to college – some of your clients may still want more control over where their money goes. And, similar to an IRA, a Coverdell account essentially offers investors the universe of investments – individual stocks, ETFs, mutual funds and so on.
– 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.
These aren’t the only ways to save and invest for college, but they may well be of interest to your clients.
Never too soon to save for school
“March Madness” will come and go but thoughts about the costs of college may be on the minds of many of your clients for the next several years. You’ll be helping them greatly by talking about ways they can prepare for the high cost of higher education.
- Average Published Charges (enrollment-weighted) for full-time Undergraduate Budgets, 2018-2019. Retrieved from https://trends.collegeboard.org/sites/default/files/2018-trends-in-college-pricing.pdf
- “The Economic Value of College Majors” Georgetown University Center on Education and the Workforce, 2015. Retrieved from https://cew.georgetown.edu/cew-reports/valueofcollegemajors/
- Friedman, Z. (2018, June 13) Student Loan Debt Statistics In 2018: A $1.5 Trillion Crisis. Retrieved from https://www.forbes.com/sites/zackfriedman/2018/06/13/student-loan-debt-statistics-2018/
- "How America Pays for College" Sallie Mae 2018. Retrieved from https://www.salliemae.com/assets/research/HAP/HowAmericaPaysforCollege2018.pdf
- Government Accountability Office, as cited by Bloomberg.com. Retrieved from https://www.bloomberg.com/news/articles/2014-09-09/why-97-of-people-don-t-use-529-college-savings-plans