Outside voices and views for advisers

Help your clients avoid disastrous mistakes when filling in college funding gaps

Funding a child's college education shouldn't blow up their retirement

Aug 11, 2017 @ 12:54 pm

By Jonathan Albano

For parents sending their kids to college this year, the numbers are staggering: The average out-of-state tuition for a four-year public institution is nearly $25,000, according to the College Board. After factoring in other expenses, including room, board and books, the yearly price tag is about $37,000, which over the course of four years comes to roughly $150,000. And, as we all know, it's typically far more expensive to attend a private school.

So even if a client did all the right things from the outset – whether it was starting a 529 plan, creating an UTMA account (or both), or pursuing another savings route – there's still a decent chance that they won't have quite enough to cover all their children's college-related expenses. Meanwhile, for other parents, the cause of their college savings shortfall may be a bit different. Perhaps they got a late start on planning, lost their job at some point along the way or were knocked off balance by the financial crisis.

Whatever the case, it's in instances like these when parents – because their primal instinct is to take care of their kids – tend to make short-sighted financial planning mistakes that can blow up their retirement. Here are four that advisers should help clients avoid:

Taking a loan from a 401(k). Borrowing against a 401(k) to pay for college is unwise. Some plan types don't allow enrollees to make contributions until they have paid off a loan balance, which could take months, if not years, depending on the length of the repayment plan. Also, if the plan participant were to quit or get fired, they would have to repay the outstanding balance promptly or risk incurring a 10% early withdrawal penalty. Anything that disrupts a client's ability to save for retirement is not a good idea, even if it's only for a short time. Advisers need to make clients understand that their retirement comes first, prevailing over everything else, including the education of their children. That's not being selfish or tightfisted. That's being realistic.

Home equity lines of credit. Having access to an additional $5,000 – $15,000 could be beneficial under the right circumstances, providing a bit more liquidity to parents who are "close" in their planning. Most clients can repay such amounts relatively quickly without significantly impacting their retirement plan. The trouble comes when they borrow more. Because the interest rate is typically far lower than federal student loans, some clients may think this is a good alternative – and it can be if they borrow in small, manageable amounts. Otherwise, it isn't. Not only is the interest rate variable (unlike student loans) but the loan is secured by the home, meaning that in the worst-case scenario (like a job loss or a medical emergency) the average person would have to dip into their retirement savings to cover the debt service. Student loans offer far more protections, including a variety of forgiveness options.

Attempting to deceive student loan providers. To win grants or secure favorable loan terms, parents will often jump through hoops to make themselves look less wealthy than they actually are. Some could ask about changing account titles, transferring assets into an annuity or even taking out a second mortgage to drain the remaining equity out of their home (since that can be one of the factors loan providers consider when deciding whether to approve an application). Invariably, these maneuvers won't win clients more financial aid and could cause irrevocable harm, like locking up an asset in the case of a second mortgage. What's more, there are legal issues to consider. Aid packages typically come down to W-2 income, which is virtually impossible for a client to hide – and it's not at all advisable to do so, even if they could.

Failing to monitor their child's credit. A tried and true practice of the credit card companies is to set up shop on college campuses and hand out credit to anyone with a pulse. This is especially prevalent during the fall semester, when incoming freshmen arrive on campuses for the first time. Many young people don't understand the perils of falling into debt at a young age and are only too happy to take the "free" money offered to them. Encourage your clients to talk with their college-bound kids about the importance of using credit wisely. When young people fall behind or find themselves on the brink of default, it's frequently the parents who bail them out. That's money better used for retirement saving.

Jonathan Albano is a partner at CCR Wealth Management, an independent financial planning and investment management firm.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 02


Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video


The #MeToo movement and the financial advice industry

Attendees at the Women to Watch luncheon commend the #MeToo movement for raising awareness about the issue of sexual harassment and bringing women together.

Latest news & opinion

Stocks plunge, advisers tell clients to hang tight

Though planners encourage calm, some are preparing investors for a correction.

Lightyear Capital's Donald Marron said to be in the hunt for Cetera Financial Group

The veteran brokerage executive, who bought Advisor Group in 2016, owned Cetera once before.

What to watch for next with the DOL fiduciary rule

Much hinges on whether the Labor Department appeals the 5th Circuit decision by April 30.

Social Security benefits losing buying power

Low inflation combined with rising Medicare costs threaten the adequacy of seniors' income.

Finra looks to streamline broker-dealer exams

CEO Robert Cook says three examination teams may be consolidated.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print