The global coronavirus pandemic and its impact on economies and financial markets around the world has taken over the traditional media news cycle. It’s also the predominant topic in social media and from other non-traditional news sources (such as the business website article you are reading) that are ever more popular today.
Like the virus itself, information about it is everywhere, repeating itself over and over again, with nothing new to say. And perhaps, like many Americans worn down by the onslaught of crisis messaging, your clients are reaching a point where another 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 relentless coronavirus drumbeat and soothe short-term worries.
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 studying at home, 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: For the 2019-20 academic year, the average cost (tuition and fees, books and supplies, room and board, transportation and other expenses) is $26,590 for in-state students at public four-year college; for four-year private schools, the corresponding expense is $53,980, according to the College Board.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 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 recently passed 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.
- Average Estimated Undergraduate Budgets, 2018-2019. Retrieved from https://research.collegeboard.org/pdf/trends-college-pricing-2019-full-report.pdf
- “Trends in College Pricing 2019 Highlights.” Research, 6 Nov. 2019. Retrieved from https://research.collegeboard.org/trends/college-pricing/highlights
- “The Economic Value of College Majors” Georgetown University Center on Education and the Workforce, 2015. Retrieved from https://cew.georgetown.edu/cew-reports/valueofcollegemajors/
- “Average Student Loan Debt in the U.S. – 2020 Statistics.” Nitro College, Nitro College. Retrieved from www.nitrocollege.com/research/average-student-loan-debt
- Issa, Natalie. “U.S. Average Student Loan Debt Statistics in 2019.” Credit.com, 19 June 2019. Retrieved from www.credit.com/personal-finance/average-student-loan-debt/
- “Average Student Loan Debt in the U.S. – 2020 Statistics.” Nitro College, Nitro College, Retrieved from www.nitrocollege.com/research/average-student-loan-debt
- Carter, Matt. “Average Time to Repay Student Loans in the U.S.” Credible, 18 Dec. 2019. Retrieved from www.credible.com/blog/statistics/average-time-to-repay-student-loans-statistics/
- "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