When qualified college savings accounts burst on the scene in the late 1990s, the initial growth exceeded most expectations. Assets in state-sponsored plans continue to soar — rising 49 percent last year, according to the Financial Research Corp.
At the same time, small tickets, bigger regulatory burdens and a go-go stock market are diminishing the interest of some advisors. Still, with “saving for college” ranking as the second most popular long-term investment goal of many clients, advisors who purport to offer comprehensive wealth management must offer 529s. The good news is this: offering the college savings vehicles is good for both the client and the advisor. Here are seven reasons why.
One
The law giveth, the law taketh away.
A unique feature of 529 plans allows donors to remove money in the accounts from estate taxation, yet still keep total control over the assets. A recent missive from Joe Hurley at Savingforcollege.com warned advisors that pending legislation might eliminate this have-your-cake-and-eat-it-too attribute. Ostensibly, contributors will instead have to choose between getting the plan assets out of their estates and keeping the control needed to change beneficiaries or spend the money on themselves. This potential revision is good reason to knock your fence-sitting clients into action, as Hurley speculates that fast-acting clients may enjoy a “grandfather” provision on deposits made before any legislative changes take place.
Two
The stork is your new lead generator.
Industry figures say there are over 5 million 529 accounts established, so you may be thinking that everybody who wants one, has one. But that number means that about 65 million children and adolescents don't have a 529 account established for their benefit. And since there's a new baby born in America about every eight seconds, it's unlikely that you'll ever run out of motivated potential prospects.
Three
Saving now vs. borrowing later.
Yes, college students will likely be able to use loans to pay for higher education expenses. And it's better to borrow money to get a college degree than to not go college at all. But a dollar saved in a 529 today can eliminate five times that amount in future student loan repayments.
How so? Say the cost of four years at an in-state university is currently about $45,000 — for everything. And say that figure rises at 6 percent per year over the next 18 years. Parents of a baby born today can expect to pay about $128,000 to get a diploma for their little bundle of joy. If money invested in a hypothetical 529 plan earns 8 percent per year, they'll need to set aside about $270 per month to reach their goal. A daunting task, yes, but nothing compared to what they'll burden their child with if she has to borrow all the money to pay for school. Assuming she can finagle a 6 percent interest rate on her student loans, she'll have to pay over $1,400 per month over 10 years to retire the outstanding debt after she graduates.
Four
“But I'm a retirement-planning specialist.”
Good for you. One of your duties is calculating how old clients will be when their children head off to Costly University. I'm guessing it'll be within about a week of the parents hitting their targeted retirement age. Assuming the dates are within a few years of each other, your clients will have limited options to meet the cost of their beloved offspring's six-figure higher education bill:
a. Work longer than originally planned.
b. Take extra taxable distributions from IRAs and 401(k)s.
c. Force the kids to borrow the money themselves.
d. Take the (likely) tax-free distributions from a 529 plan. This seems to be the most stress-free proposition.
Five
Clients have children so they can have grandchildren.
Over the last few years several 529 providers have released surveys detailing how very willing and able grandparents are to help pay for the college educations of their children's children. But although the elders have the means and the motivation, they don't have the information. That's where you come in — and you'll be rewarded handsomely for your educational efforts.
Grandparents are even better 529 candidates than the kids' parents, and not just because the seniors generally have more money. Older clients will appreciate the flexibility 529 plans offer to combat the uncertain future of estate tax laws. Today, assets in 529 plans owned by grandparents won't reduce financial aid packages for most of the children who attend college.
Grandparents are even more likely than parents to seek the help of a financial advisor when considering college savings options. They may open accounts for a dozen or more grandchildren, compared to the 2.1 children most parents are supporting. Spend a few hours today calling your clientele in the 60-plus age bracket. Ask them about their grandchildren, let them brag for a few minutes and then see if the grandparents want to help the above-average apples-of-their-respective-eyes realize the untapped potential with the help of a formal higher education.
Six
Embrace the confusion.
Some advisors avoid 529s because the myriad plans and technical specifications make it too bewildering to sort through. But that complexity is to your benefit. Instead of cursing the college-planning darkness, use it to your competitive advantage over other advisors — not to mention the do-it-yourself portion of the investment industry. Families invest four out of every five new 529 plan dollars with financial advisors. No other commonly-used investment is so dominated by people using professionals like you to help them reach their goals.
Seven
Trends are your friends…
…At least when it comes to inspiring clients to save for college with 529s. According to most sane individuals, developments in the crucial financial factors of a college education will only make college savings plans even more essential.
| Component | Direction |
|---|---|
| Importance of having a college degree | Higher |
| Cost of going to college | Higher |
| Availability of financial aid | Lower |
| Tax rates | Higher |
Ask parents and grandparents who may be reluctant to save for college what they think the future holds for these issues, and you'll find them swiftly moving to the ranks of the converted.
Writer's BIO: Kevin McKinley is a CFP and vice president of investments at a regional brokerage and author of Make Your Kid a Millionaire — 11 Easy Ways Anyone Can Secure a Child's Financial Future. kevinmckinley.com
