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Will Higher Education Ever Be Free? A Financial Advisor’s Guide to College Planning and Student Debt

Jamie Hopkins - December 13, 2022 - 0 comments

There’s no question college costs are daunting: The average tuition and fees for the 2020-21 school year was $9,400 for public in-state four-year schools, climbing to $37,600 for private nonprofit four-year institutions, according to the National Center for Education Statistics. And that doesn’t include other related costs, such as books, supplies, transportation or living expenses for students seeking an on-campus experience.

As you might expect, many families borrow money to cover this expenditure, including nearly 50% of private school families and 40% of four-year public school families. That adds up to significant debt, with the average borrower owing roughly $30,000 at graduation. That can take a bite out of their future quality of life.

We certainly have no illusions about the expense we could incur; in fact, a Morning Consult survey found more than three-quarters of adults said it would be difficult for them to afford a college education.

But there is some help at hand. Most notably, the Biden-Harris Administration’s Student Debt Relief Plan, which is poised to erase eligible federal student debt for a wide swath of Americans. The plan will wipe out up to $10,000 for individuals earning up to $125,000 and households earning up to $250,000, with that amount rising to $20,000 for those who had Pell Grants while in school. While federal student debt payments – which account for roughly 92% of student borrowing – have been on hold throughout the pandemic, payments are scheduled to resume January 31, 2023. Yet with many achieving relief, this student loan debt forgiveness plan has sparked a resurgence of hope that college may eventually become free.

For some, college is already free today, given the multitude of programs that provide tuition in certain circumstances. For example, some states like New York and New Mexico cover four years of tuition at most state schools for students who meet certain income qualifications, and 31 states offer free community college to high school graduates, with varying eligibility requirements. In addition, many corporations are now using tuition reimbursement as an employee benefit. And some of the highest-profile universities, like Princeton and Stanford universities, offer free tuition for some students facing financial need.

While many devoted parents and grandparents want to avoid the college debt struggle for their child or grandchild, this explosion of college tuition and debt forgiveness programs could give pause to many of your clients. They may begin to question the wisdom of saving for college. After all, if they believe student debt will eventually be forgiven or if these free college tuition options continue to proliferate, they might believe setting money aside specifically for education could become a waste.

As legislators and higher education experts continue to explore solutions, how can you help your clients make the decision that is best for their family? Start by knowing the answers to common questions that advisors receive from uncertain clients.

How likely is it that my children or grandchildren will be able to attend college for free? Should I even be saving in a designated college account?

With all the many demands on their funds, clients are rightly hesitant to devote savings dollars to something they may not need. You might suggest three options to families weighing a college savings plan.

First is how much value they place on allowing the student to choose where they want to attend school, rather than having them be limited to more affordable schools. It’s a wonderful gift to tell a loved one they can choose their path forward and not be dependent only on choices that fit certain parameters. However, asking the student to avoid private institutions or staying in-state can drastically alter the cost of tuition.

Second, consider that many students either need or want to continue with their schooling after earning an undergraduate degree. In many fields, the market is shifting towards the expectation candidates will have a post-college degree. In fact, the number of students earning master’s degrees has been steadily rising. In 2021, 14.4% of U.S. adults had an advanced degree, rising from 8.6% in 2000. There may be some industry-based skill sets that are needed to make that next income leap, and they will be at a disadvantage without the resources to earn one.

Even if some in-demand technical skills lean toward being company-funded, I would venture to say there is no world in which law, medical or business school will be universally free. So, even if their student does qualify for reduced or free tuition for undergraduate education, the money that’s saved could fund this part of their future.

Finally, it’s important to initiate a conversation regarding the percentage of future education parents want to cover. There’s a common “all or nothing” mindset, but it could be more prudent to plan to help their kids with 20% or even 50%. Choosing a portion can be a healthier way to look at the topic of college funding, and it removes some of the stress they might be feeling at having to amass such a substantial sum of money. It also can put their mind at ease regarding the potential for saving funds unnecessarily if college becomes “free.”

But no matter what scenario a family faces, this discussion is the perfect time to remind clients of their financial priorities and reiterate that their retirement and well-being must come first. That means not saving for college at the expense of their future. As we commonly say, you can borrow for college, but you can’t borrow for retirement.

Why not take on student debt if it will potentially be forgiven?

There is no proposal on the table which suggests ongoing college loan forgiveness is imminent – or that it will be available to all families. Any plan for a “universal program,” which would waive tuition and fees regardless of family income, is liable to continue to face resistance. In fact, even the current debt relief plan – which does have financial guardrails in place – is facing backlash in court.

Many borrowers also need to take on more debt than federal limits allow, and there has been no discussion about forgiving private loans.

To me, the key is that most people don’t want to bank on the government fulfilling all these needs. Instead, they likely prefer to have peace of mind that their child’s college funding doesn’t depend on the next election cycle or fret that things could change even if programs are eventually put in place. Government regulations are not permanent, which means even if programs pop up here and there, loan forgiveness will likely not become perpetually permanent.

When should I start saving for college?

Common wisdom suggests that clients start saving as soon as their child or grandchild is born. And of course, there’s nothing wrong with getting a head start on the process. However, immediately jumping into saving for college can put a burden on new families at a time when they are already adjusting to a wide variety of financial needs.

I think we tend to do parents a bit of a disservice when we lecture them to start saving immediately. I would suggest giving them “permission” not to save right out of the gate. Instead, they could establish a comfortable quality of life, take care of their housing and other expenses, boost their earnings, then supercharge college savings when they are more financially stable. Sometimes we assume we’ll have the same standard of living across our lifetime, but it might be too much to prioritize college funding and retirement savings with a young family.

It’s important to also note that funding goals might change as their child gets older. Parents or grandparents may realize one child is unlikely to attend college or another may be a standout musician or athlete who is well-positioned to earn a significant scholarship. (Although even then they have to decide if they are willing to have their child select a school based on who makes an offer.)

What investment vehicles should I be using to save for college in this changing environment?

Discussing college savings and the appropriate vehicle should be an important part of your consultation with your client. There are three main choices:

  • 529 Plans: Many advisors recommend these as a top choice because the gains grow tax-free, and the owner won’t have to pay federal income taxes on the money when it’s withdrawn for qualified educational expenses. Talk to them about the wisdom of “age-based portfolios” so they can take advantage of more aggressive stock picks early on, then transition to safer investments as the time horizon to college shortens.
  • Uniform Gifts to Minors Act/Uniform Transfers to Minors Act (UGMA/UTMA): These “custodial accounts” can be attractive because they offer tax benefits, yet also can be used for purposes other than education. If a client is truly convinced that they don’t need to save for college, this might a wise suggestion to accomplish all their goals. However, remember that once their child turns 18, the account automatically transfers to them to use as they choose. In addition, since the account is in the child’s name, colleges will consider it their asset when assessing need-based financial aid, which could work against them.
  • Roth IRA: As soon as a child starts earning a paycheck, they can open a Roth IRA, which parents can also help fund to offset expenses in a tax-efficient way. However, these accounts in the child’s name may affect need-based aid so you’ll want to help them think through the various scenarios.

As for clients tapping their own retirement accounts, I wouldn’t recommend using those assets for their child’s college expenses. Again, help them remember the adage that you can borrow for college, but not for retirement.

Deciding which vehicle is best to focus on when saving for college depends on your client’s individual situation and what they are trying to accomplish. Walking through the pros and cons of each should be part of a comprehensive conversation about how to save for college.

How much should I be savings to account for potentially reduced college costs?

Again, this is a great time to discuss your clients’ goals and how much of the eventual cost they intend to finance. Then you can move into their comfort level with saving that entire amount. So if they are certain that 30% of college will be free, then they can fund the remaining 70% of the projected expenses and accept the risk of taking the rest as debt should free college not materialize.

The equation will look different for every family based on their goals and financial situation.

What if I save more than my child needs?

Your clients may be concerned that if they sock away money in a tax-advantaged account, especially a 529 that is designated exclusively for educational purposes, they will owe penalties if they no longer need it for college costs – whether because of an attractive scholarship, the choice to attend a cheaper school (or no school at all),  or governmental action.

First, it’s important to note that even if college tuition is covered, these funds can be used for a wide array of other educational costs, from room and board to books and technology. If a child decides against a four-year program, the funds can even be applied to certificate programs or apprenticeships.

If the person for whom the account was originally designated truly doesn’t need the funds, the account holder can select another beneficiary, such as a grandchild or even themselves if they choose to go back to school. The bottom line is it’s highly unlikely they won’t find someone who can use it.

And remember, if the government does eventually make all college costs free, that doesn’t mean your client’s money will disappear. Legislators may create a complementary plan that could alter the current rules to allow savers to leverage these funds for other uses.

Help your clients find their freedom

We frequently talk about the joy of financial freedom, and the college conversation is one foundational piece. As you work with your clients on a holistic financial plan, helping them find clarity on their college-related goals is essential.

The college savings conversation is an ideal time to open up the broader topic of helping your client design their life to find their freedom in how they want to live it today and in their future.

Key Takeaways

  • It’s likely there will always be some costs to college, even if tuition is eventually free.
  • Young families may not be able to prioritize college savings, and that’s OK.
  • There are three main types of investment vehicles that are ideal for saving for college.
  • Talk to clients about ways to repurpose unused funds in accounts designed for education savings if their child doesn’t go to college.

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