Advising parents who started saving for college a little too late can be heartbreaking.
Larry Rosenthal has recommended to clients more than once that they pull the plug on sending their child to the Ivy League school the student worked like crazy to get into because paying for it could bankrupt them or strap their child with ridiculous debt.
“There's no magic solution to this,” said Mr. Rosenthal, the founder of Rosenthal Wealth Management Group. “College costs have gone crazy.”
While there's no simple approach when parents have failed to sock away enough money for tuition costs that rose an average of 5% every year over the past decade, advisers recommend various last-minute strategies to clients so they can fund their kids' college without risking their own financial futures.
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The tactics include investment vehicles with tax benefits, making the right college choice and seeking financial aid from sources as diverse as grandma and the midtier private school a state away.
Fundamentally, these clients need help figuring out how much college they can afford to cover for each child.
“Advisers need to ask these clients some hard questions and help them make some big decisions,” said Matt Golden, vice president at Fidelity Institutional Asset Management.
It begins with estimating costs.
Last year, annual tuition and fees averaged $9,140 for an in-state student attending a four-year public college, $23,893 for an out-of-state student attending a state university, and $32,405 for a private college, according to the College Board. Room and board, books and personal expenses, including transportation, can cost close to $15,000, pushing that private school bill up to around $45,000 a year.
It is also safe to say that the better the reputation of the school, the bigger the bill. The total cost for Harvard, for example, was $60,659 last year.
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Families need to determine where the assets will come from to fund college and how much of a loan burden they are willing to take on. Advisers should show clients what that loan load will mean in detail down the road before the parents or student commit to paying off giant sums, Mr. Golden said.
One tax-friendly move families can take even if there are only a couple of years before sending the first-born off to college is to have the student fund a Roth individual retirement account. Contributions put into a Roth IRA can be withdrawn tax-free without penalty to pay for college, or any purpose, while any earnings stay in the account and grow tax-free for retirement.
Ken Mahoney, CEO of Mahoney Asset Management, likes this strategy but stresses the need to have the money invested conservatively since there isn't much time before it will be needed.
The student must have earned income during the years he or she funds the Roth IRA, and the amount contributed cannot be more than what the student earned that year. The maximum that can be contributed in 2016 is $5,500.
Mr. Mahoney also often recommends that parents open a 529 college savings plan, a savings vehicle that's best known as a great method for investing over a decade or more. But even with only a year or two before tuition bills begin, starting a plan may make sense depending on fees and where the family lives because many plans have state tax deductions, Mr. Mahoney said. Some states even make contributions when accounts are opened, which is free money for college. Most plans have age-based investment options to keep the risks in check.
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Most advisers, including Mr. Mahoney, argue against taking money out of parents' 401(k) or individual retirement accounts to pay college bills. They commonly argue that loans can be taken for college, but not for retirement.
Counseling families on which college the student should choose is another way advisers are helping clients keep costs in line with their resources.
It's increasingly popular to have students attend community college (at an average annual cost last year of $3,435) for two years before paying the more expensive university bills for the student's final two years, said Suzanne Shier, chief wealth planning and tax strategist for Northern Trust.
Advisers also can help families map out the actual costs of attending various colleges, which is easier than it used to be thanks to a federal requirement that schools provide a net cost calculator, Ms. Shier said.
Considering state schools rather than private colleges is often a way to incur lower costs, but even looking more deeply into the cost of the public options can be a help.
Mr. Rosenthal recently figured out that one family he was working with would spend $120,000 more over four years to send their child to an out-of-state public college than it would cost an in-state student. The school was a lot more expensive than their own state's public colleges.
The parents were thinking about using $100,000 of their retirement savings to cover the difference between the school's cost and what they had saved.
“They're not getting a more valuable education than the student paying $120,000 less,” Mr. Rosenthal told the parents, who are still thinking about their options.
In some cases, a certain school might be worth paying extra for. For example, a school that offers rigorous internship programs might be more valuable than another school that is less expensive but doesn't offer such programs.
An online tool, https://collegescorecard.ed.gov/, can help families evaluate how much graduates are likely to earn after attending different schools. It allows for a comparison of schools by how much more their graduates earn than high school graduates.
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The good news for advisers is that families are more willing than ever to consider cost-management strategies.
In a Fidelity survey earlier this year of 2,196 parents who have children expected to attend college, 71% said they are thinking about ways to keep costs down, such as having the student live at home or graduate in fewer semesters. In 2007, only about half of parents said they were considering these options.
Similarly, about three-quarters of families today are thinking about new income-generating strategies to pay for college, such as having a spouse who doesn't work return to a job or having the student work on campus. In 2007, about 53% of families were considering such options.
Advisers can help clients expand their thinking about where the money will come from, and many today are recommending a glance up the family tree.
“For many people, there is a big opportunity to better engage grandparents in the college planning and savings process,” Mr. Golden said. “Advisers can play a valuable role in initiating and guiding these intergenerational conversations.”
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Advisers also can help clients find independent college admission consultants, who assist families with everything from test preparation and finding scholarships to finding the right college, which can mean identifying schools eager to provide grants and other incentives to particular students. Most consultants charge anywhere from $3,000 to $6,000 for a package of services, according to the Independent Educational Consultants Association.
Some midtier private schools will offer attractive financial aid packages to get high-achieving students in their doors, said Trish Gildea, senior financial planner at Summit Financial. So if a client's child's College Board scores or grade point average are above the profile for a particular school, chances are the student will get more financial aid at that school than at a more challenging college.
Finally, advisers should offer families help figuring out how much debt is reasonable to incur and which loans parents and their children should take out to cover college expenses.
“Government-subsidized loans are often a better option than private loans, even if the private loans have a lower interest rate,” Ms. Gildea said. “Government loans tend to have greater flexibility if your child runs into financial trouble in the future, while some private loans have potential rate increases that may exceed the fixed federal rate.”