By Joseph Clark
College planning is a commonly overlooked piece of retirement planning. Most families and advisors haven’t even considered discussing college planning. And that’s because the majority of our mindsets tend to be focused on the accumulations of savings for retirement assets put into 401(k)s and IRAs. Add to this the currently challenging economy and instability of the marketplace, and it’s easy to see why most are focused only on the retirement nest egg and college planning gets overlooked.
Why do Americans save money in the first place? This question draws an array of answers — but there is one common thread. Most people save and plan because the goal is something near and dear to their heart. This is exactly where college planning fits in and unfortunately most American families are inadequately prepared for it.
Studies show that the majority of boomer families with college bound children do not know how they will finance their children’s college education. This is a big concern due to the rising cost for college education, with the current costs ranging anywhere from $50,000 to $200,000, depending upon if they attend a local or regional school verses going to a tier one school.
Paying for college, however, is the only one part of the puzzle. Matching the choice of the most suitable college or university and to navigate all the details of the process can be overwhelming and confusing.
The number of high school graduates and their parents turning to professional education consultants for help is expected to double in the next ten years, according to USA Today. Or, simply put by Money Magazine, a great number of colleges are now willing to pay to get the students they want. Many are offering financial aid to families that earn in excess of $150,000 per year. The students who typically receive the most lucrative college funding offers are those who know the most about the process. In today’s economy, it is a necessity to have a college degree to compete in the work place. We know that there are a fair amount of jobs out there that do not require a college degree, but typically they do not pay as well as the ones that do. The average student with a college degree makes almost double the amount of money over their lifetime as someone with a high school diploma. So planning for college funding is essential.
The misconception of actual college funding starts with most families looking to private sector of funding from local employees, major corporations (like Coca Cola, Visa, insurance companies etc.) who frequently give away millions of dollars per year in scholarships. Keep in mind this is only about 3 percent of all of the funding awarded each year. Families shouldn’t spend 80 percent of their time going after 3 percent of the money.
Right now there are over 60 colleges with endowment funds of over $1 billion dollars. There are over 300 schools with over $100 million in endowment funds. Colleges are businesses too so when it comes to tuition costs why pay the sticker price, when you should never pay sticker price. Obviously the colleges have more money than we do, so why not get them to contribute to the cost of the education. As you can see colleges are the largest providers of gift aid.
To maximize the amount of money from the school there are several important strategies: first the student needs to take care of business in the classroom. Grades are as important as test scores. Next colleges are now looking for students who are active participants in their community, because they want students who are involved in their community while attending school. Schools are attracted to students who will, in the future, once they have graduated, be willing to give back to the endowment funds; this enables the school to continue to fund future students’ education. Keep in mind, colleges do not look at gift aid as a handout, instead they look at it as an investment. As mentioned earlier, colleges are a business and they are looking for a good return on their investment and in this case the student is their investment.
The government and colleges use the Free Application for Federal Student Aid (FAFSA) to determine a student’s financial eligibility for student loans. The FAFSA can be complicated and many families make mistakes on when answering the questions. The information put into the FAFSA form then is evaluated and used to come up with a Expected Family Contribution (EFC) amount, this will determine the student’s eligibility for financial aid and financial need. The lower the EFC score, the higher the chance is for eligibility for the college endowment funding. In the same way, the higher the EFC score, then the more the family is considered as having the ability to self-pay.
There are a variety of strategies that can help to lower the EFC and this is where the repositioning of excess assets, excluding the family’s 401(k)s and IRAs would come in. If a family has excess assets above their traditional retirement accounts those excess assets may count against them when determining their EFC, which will result in more out of pocket investment required of the family for education. Proper repositioning of excess assets into safe and secure insurance products such as life insurance and annuities will help to lower the EFC score because these are considered exempted assets according to the FAFSA calculations.
Currently within the economic conditions more parents have become concerned about their ability to fund a college education for their children. Take into consideration the repeated drops in the stock market and the effect this has upon 529 college plans, because the funds within them are exposed to the market unpredictability and market losses. According to most recent reports, these plans have sustained significant losses as a result of the recent and repeated market crashes.
Last year the student loan amounts just exceeded the 100 billion mark for the first time and total loans outstanding exceeded 1 trillion for the first time in history. American’s now owe more student loans than credit cards and this will plague our new generation of young people who are now starting their lives out in deeper debt. Retirement Advisors must embrace the college planning process for our Boomer families, as this is in great demand now but especially for the future generations.
When it comes to having the complete college planning process fully streamlined and complete, you must work with a college funding service that takes the time off your hands and gives you the blueprints for the complete planning process needed to lower the families out of pocket costs for college tuition and help the family through the whole process.
In summary, the Retirement Boom has just begun, with over 7,000 Americans per day turning 65, which will cause retirement rates to rise significantly over the coming years, thereby reducing savings activity. Couple that with the projections of over 3,000,000 students who will start College annually and there is only one conclusion: How can you, as a financial consultant, in this market, not become educated and skilled in this already underserved market segment?
As a Business Development Advisor with Brokers’ Choice of America I strongly believe that it is an important time to implement sound college planning concepts into your practice for 2012 and beyond.
Joseph Clark, CFED®, RFC®, is a business development advisor with Brokers’ Choice of America, a Certified Financial Educator (CFEd) and a Registered Financial Consultant (RFC). He has extensive knowledge in preservation and distribution of wealth, retirement planning strategies, reduction in financial risk, lowering taxes and protecting assets from catastrophic illness and provides agents with advanced case design.
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