Roadmap to College Planning for Advisors

Roadmap to College Planning for Advisors

The American College of Financial Services
February 21, 2020

Today's financial world is changing, and advisors are expected to change with it. More and more, clients are seeking out financial planners who can provide guidance in all aspects of their life, and often this includes planning for college.

Higher education is a classic economic problem of human capital and consumption timing, and with the cost of attending college rising every year, solutions advisors provide have to be unique to every family. However, our experienced and knowledgeable thought leaders can offer some pointers on planning and saving strategies for when your clients start considering the biggest questions related to college funding.


Who Will Pay for College?


Before any final financial decisions are made, the client first needs to decide whether they will help pay for college, or if the burden will be solely on the student. This is a key part in the planning process because it all comes down to communication, and many times those involved may not be on the same page. Ross Riskin, CPA/PFS, CCFC, CFP® program director, and assistant professor of taxation at The American College of Financial Services, recommends using a matrix where an advisor and their clients look at two primary factors: retirement savings and the student’s level of dedication to schooling. “If retirement savings are sufficient, then I want to look at the motivation of the student, so that’s a combination of looking at grades and career interests,” he says. When a student is highly-motivated and has their own aspirations to go on to higher learning, parents and caregivers can look at educational costs as an investment in their children. On the other hand, when students aren’t motivated or have little desire to be in school, Riskin advises the cost be placed more on the them.

The role of the financial advisor is crucial in this decision-making process. Advisors need to ensure everybody involved in the decision is talking to each other and must continue to become more knowledgeable in the area since financial aid formulas, as well as state and national regulations, are constantly changing.


What's the Plan?


After the client decides who's paying for college, the role of the advisor then becomes providing them with a strategy on how ultimately to pay for it. Experts agree on three strategies that clients should try to integrate into one plan:


  • TAX PLANNING: When working with high-income clients, focus should be placed on tax planning strategies. The American Opportunity Credit and Lifetime Learning Credit allow students the chance to receive tax credits for education expenses paid. If students are dependents, parents can take these deductions on their tax returns.


  • CASH FLOW: Liquidity planning is important for everyone. If the family has used a savings vehicle, take note of which kind and see if it makes sense to tap into that fund for loan payments.


  • FINANCIAL AID: View your client's financial situation to see if they're a position to qualify for financial aid. It’s important for clients to take advantage of the U.S. Department of Education's Free Application for Federal Student Aid (FAFSA) to receive financial aid or grant money.

Determining where your clients stand on the above strategies is important in order to provide them with a plan that works for everyone and is attainable.


What are Your Options?


Once you determine that the client plans to help the student pay for college, advisors can assist with considering clients’ options. Two in particular stand out: 529 plans and Roth IRAs. 

A 529 plan is a tax-advantaged savings plan designed to defray future costs of college. 529 plans are aligned with families with college-bound children. There are two types of 529 savings plans:


  • PREPAID TUITION PLANS: Prepaid plans allow families to purchase units or credits at participating colleges and universities for future tuition at current prices for the impending student. It's important to read the fine print on prepaid tuition plans: they aren't guaranteed by the government, so it's necessary to check with the state issuing them to ensure the money paid is guaranteed.


  • COLLEGE SAVINGS PLANS: College savings plans let families open an investment account to save for the beneficiary’s future higher education expenses, such as tuition, mandatory fees, and room and board. College savings plans are a better fit for most people, due to more flexibility and options.


In the 529 savings plan, you can always get money back out, but you will not receive the tax benefits if the money is not used for qualified education expenses: however, under new regulations that are part of the SECURE Act, that may be changing. 529 savings plans benefits have no income restrictions on contributions, and some states provide income tax benefits for contributions into the plans.

Roth IRAs are known as tax-deferred retirement accounts, but they can actually be used for both college expenses and retirement income. Both parents and working students are able to contribute, and there are no restrictions on income. Roth IRAs offer a lot of flexibility compared to the 529 plan since the money earned doesn't have to be used for qualified education expenses. If a student is on the fence about attending college, investing in a Roth IRA is a safer bet. Working students are also able to contribute to the Roth IRA along with their parents.