The average college student is graduating with over $37,000 in student loans. And they aren’t the only ones taking on debt: Parents are borrowing more than ever to help their children pay for a college education, and jeopardizing their own retirement goals in the process. Like any other investment, families need to obtain the proper guidance on how to save and pay for college. By asking a few questions, you should be able to narrow your search and find the right person.
Do you incorporate college savings vehicles into your planning strategies?
At a bare minimum, your advisor should be highly knowledgeable about the multiple ways to save for college. There are two primary college savings vehicles:
529 savings plans are the most well-known of the college savings vehicles and similar to a Roth IRA in terms of the tax advantages. You contribute after-tax dollars and distributions for qualified higher education expenses are tax-free. Some states even offer a tax deduction for 529 plan contributions.
Prepaid plans and the Private College 529 Plan have similar tax benefits to the 529 savings plan with a few important differences. Both plans allow you to prepay for tuition, essentially locking in at today’s rates. Your child can use the money to pay for tuition at schools that are included in the respective plan’s network (typically in-state for state prepaid plans, and at any of the almost 300 private schools in the Private College 529 Plan’s network). These plans do not charge enrollment or annual fees to plan owners.
Although most financial advisors are limited in what they can offer you, they should still be aware of the benefits of the different options. Your advisor should be able to help choose the appropriate plan or combination of plans and determine the necessary savings goal. Additionally, they should help recommend investment options for the 529 savings plans that suit your time horizon, goals and risk tolerance.
What is your primary service?
There is much more to college planning than just knowing how to save for it. The right advisor should also be able to provide guidance on how to “pay” for it.
The majority of advisors specialize in managing money and have limited experience in comprehensive college planning, or any planning for that matter. An advisor should be able to clearly state the services that they provide and who they provide them for.
If an advisor states that they include “college planning” in their offering, then ask them to elaborate on their process:
- How do they address college selection?
- Are they familiar with the Expected Family Contribution (EFC)?
- Do they employ tax strategies to help defray college costs?
- What impact will paying for my child’s college have on achieving our financial objectives?
Proper college planning should incorporate college selection, financial aid, tax aid and wealth management into one process. Advisors need to have knowledge in all these areas and coordinate when necessary with CPAs, attorneys and admissions consultants to ensure proper implementation.
How familiar are you with the financial aid process?
Colleges can require multiple aid applications, including the Free Application for Federal Student Aid (FAFSA) and/or CSS Profile. Each application has its own aid methodology that produces your EFC. Your EFC is the minimum amount that colleges will expect you to contribute each year towards your child’s education.
Since EFC is the primary factor in determining your need-based aid eligibility, an advisor should have a clear understanding of how it is calculated and how to optimize aid eligibility if necessary. Below are some other actions that your advisor should be able to address.
- Help with completion of aid applications
- Evaluate your “Net Price” for college
- Incorporation of merit aid strategies
As you can see, comprehensive college planning should incorporate much more than someone just recommending a 529 plan. There is a tremendous amount at stake here. Be proactive, find the “right” advisor and begin developing your college planning strategy as soon as possible.
This article was originally published on Saving for College