Broker Check

Published Articles

Reprinted From: LIFE & Health Advisor, SEPT 2007

The Journal for the Financial Services Industry

Growing Your Practice

Planning key to funding college, living happily ever after

by Randal Poirier, ChFC

Randall Poirier is a Financial Planner with Beaulieu

Financial Group, Little Compton, R.I., an affiliate of John

Hancock Financial Network.

Recently, I’ve seen quite a bit written about whether parents are better off funding their retirement or saving for their children’s education. With today’s longer life spans, there’s no doubt that making sure they’re prepared for retirement must take precedence. However, when I’ve advised families with children, saving for college for their kids is one of their top financial goals. And recent national research of parents of kids who are in college or just graduated shows they wish they had done earlier. Because building a college fund can range from creating a small account to covering the entire sum, I believe we as advisors are in a position to help families achieve both. It is paramount that we discuss college savings as part of a comprehensive financial plan.

Broaching the subject

The first step is bringing it up, I cover it during a general goals discussion that I have with all my clients because many relatives might want to help out to send a child to college, especially in a tax advantaged way. For parents, the discussion can be one of mixed emotions. On one hand, sending a child to college is a much nicer subject than, say, financial planning for needing long term care or insurance in the case of an untimely death. But on the other hand, so much has been written about rising tuition costs, they may seem astronomical and out of reach, which can lead to a sort of financial paralysis. I usually don’t have to point out the advantage that a college education can provide, according to a 2002 Census Bureau Report, lifetime earning potential for college grads can be double or more than double of what those with only a high school diploma earn. But, I do try to let them know that college planning is important, and often overlooked.

In a recent study, more than half of the parents surveyed (57.2 percent) said they didn’t really save for their child’s education and 16.7 percent said they did not even start thinking about saving for college until their children were between 16 and 20 years old. With that record, it wasn’t surprising that more than half (53.6 percent) also said they’d be paying off student loans for years. According to the survey, parents said they wish they had known how expensive college really is (45.2 percent); how scholarships and awards are determined (40.8 percent) and how to start a 529 savings plan (35.5 percent). They also wish they had done certain things including: starting to save earlier (55 percent); opening a 529 savings plan (33 percent); and having their son/daughter save more (19.4 percent).

Discussing the options

There are many options parents can use to save for college. Unfortunately, tuition, large enough on its own, is only part of the financial picture of sending a child to college. Factors such as room and board can significantly increase the figure parents will really need when the time comes. I do not calculate these figures to scare them, but more to start a frank discussion of what they realistically can hope their savings will do, cover the full cost, or just a portion. It is important to help them realize that saving for college is not an all or nothing proposition and every little bit helps. While there are several vehicles to consider, mutual funds, savings bonds, Coverdells, UGMAs and UTMAs, the one that I’ve found to have the most in the way of advantages and benefits is the 529 college savings plan. The 529 college savings plan is usually established by a parent or grandparent who becomes the participant, while the child for whom the money is being saved becomes the beneficiary. The money invested grows tax-deferred and the withdrawals, money for costs including tuition, room and board, fees, books, supplies and equipment, are received federally tax free. (There also are state tax benefits for some plans.)

By contributing to a 529 plan, any donor (parent, grandparent, aunt, uncle, friend etc.) takes taxable assets out of his or her estate, while qualifying for the $12,000 annual federal gift tax exclusion. In many cases, a donor can accelerate that by five years, contributing up to $60,000 per beneficiary at once and $120,000 if married and filing jointly without paying gift taxes.

Another reason I like 529s is that the participant or account holder maintains control of the savings rather than the beneficiary. This prevents the young adult from taking all the savings and using it for something other than college. It is also convenient that the beneficiary can be changed at any time to another family member, in the case that the original beneficiary decides not to go to college.

UGMAs (Uniform Gift to Minors Act) and UTMAs (Uniform Transfer to Minors Act) offer a wide array of investment options, but once the child reaches the age of majority, he or she makes the decisions about how to use the money, which doesn’t have to be for college. Stock, bonds, mutual funds, CDs and other investment vehicles, do allow clients to invest for the future, but none offers the combination of high contribution limits, tax-deferred growth, accelerated gift contribution ability and federal tax free withdrawals for qualified education expenses that 529 savings plans do.

Coverdells have limitations that make them less flexible. As an example, you can only contribute $2000 per student per year and there are eligibility limitations based on your adjusted gross income, which removes this as an option for high income families.

529s also are administratively easy for your clients. Once they determine which plan they’d like they enroll with a beginning contribution. If they elect to sign up for automatic deposits, it’s very much “set it and forget it” – they won’t (nor will you have to) manage the money in an age-based portfolio, nor will they need to worry about reporting any taxable earnings until the year that the distributions are taken.

Contribute early and often

No matter what vehicle is ultimately chosen, it bears repeating that saving something is better than nothing. Very often, starting with just a small amount, a regularly contributed small amount, is the best way. When saving becomes routine, it is easier to maintain the investment. If started early, even a small amount can grow substantially over time. When the family budget can withstand a larger contribution, the account will grow that much faster. Saving for college is something parents, or any relative or friend, is usually happy to do. In fact, in another national study on saving for college the vast majority of grandparents (83.1 percent) said they would prefer to give gifts of contributions for college education than toys or clothes. And nearly an equal number of parents (80.9 percent) said they’d prefer to have their children receive contributions for college education as gifts rather than toys or clothes. Not only will it be something your clients can feel good about as they’re doing it, they may even feel some relief at making a major future financial cost more manageable.

When a steady contribution is made, there likely will be less in the way of loans the parents will owe, at the time they may need to be cutting back on their expenses. The head start they’ll be giving their children will help the young adults as they start out their independent lives after college.

Great relationship builder

Not only will your clients benefit from contributing to a 529, establishing one enables you to ask them if other relatives might want to contribute…or need a financial advisor.