Advisers must examine college savings strategies to get clients to their goals

Advisers must examine college savings strategies to get clients to their goals
Schooling remains crucial for career prospects, but with tuition sky high many parents are questioning college savings and the value of an education
DEC 14, 2020

Higher education has reached an inflection point. The rising cost of tuition has arguably become unsustainable, having soared into the tens of thousands of dollars on average for four-year public institutions; it has well outpaced inflation for the better part of four decades. 

As with much else this year, COVID-19 has refocused the narrative. As students around the country attend classes remotely, parents are reevaluating their expectations for the college experience — and what they are willing to pay for it. 

Post-high school education remains crucial for long-term career prospects, but with tuition sky-high, many parents are questioning its value in a virtual environment, as Mark Schoeff Jr. reported in his Dec. 7 cover story. 

Students risk missing out on aspects of campus life that often play an important role in their transition to adulthood. Are the enormous investments sunk into education worth the costs when students aren’t in-person and on campus?

As much of America considers the fate of traditional college programs, advisers must examine their own college savings strategies to make sure adequate tools are available to get clients to their investing goals. While parents strive to find the most cost-effective paths to improve their child’s education, advisers should also be cognizant of the fees and costs families may incur along the way.

According to a recent Morningstar study, investors plugged more than $363 billion in total assets in 529 plans as of August. Of the 61 plans that Morningstar evaluated, eight received negative ratings because of “subpar allocation approaches” or “exorbitantly high fees.” Those and similar plans were unlikely to provide a positive investment experience relative to other readily available options and should be avoided, according to the research. 

The effect that fees can have on investment returns is well documented, and it’s time to consider the differences between plans — an adviser-sold or direct-sold 529 plan, for example — and what those choices might mean for college savings. 

The good news is that there are plenty of options. Taxable accounts or Roth IRAs and 529 plans are some of the most common, in addition to others like the Uniform Gift to Minors Act and Coverdell Education Savings accounts.

Parents have always been able to tap 529s to pay college tuition and room and board, but recent legislation has made the accounts even more attractive by adding additional types of expenses, like the K-12 education, student debt and vocational education costs. 

Sales of 529 plans have been on the rise in recent years and totaled $33.9 billion from the third quarter of 2019 through the third quarter of this year, according to ISS Market Intelligence, compared to $31.6 billion for the previous year. 

The more adept advisers are at applying these plans to a range of post-high school educational paths — and steering clear of any unnecessary fees — the better they can guide their clients to their goals, whether those include a college education or forego traditional programs altogether.

The role of financial advisers has arguably never been more pivotal in the college planning process than right now.

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