Everyone, including advisors, has a multitude of financial demands all competing for their limited “pool” of money, and there are some valid reasons why clients aren’t saving for college in a 529 plan. Closely tied to this conversation are the topics of ‘priority,’ ‘discipline,’ and ‘hope,’ all of which we will address in this article.
Here are the top 10 reasons clients give when asked about why they aren’t saving more for college, and how I respond.
1. My child will / will have to receive scholarships.
There are, no doubt, amazing qualities each child possesses, whether it be athleticism, intelligence, personality, or a multitude of other unique talents we, as humans, possess. Unfortunately, the fact that there ARE so many talented individuals means the competition for the wide variety of scholarships available is intense. “Aid,” in fact, means many different things; there is federal aid, state aid, institutional aid, Stafford loans, Federal Pell Grants, work study programs, unsubsidized and subsidized loans. Finally, the type and amount of aid varies widely based on household income. In short, understanding aid is complicated and can be overwhelming. According to the National Center for Education Statistics, 77% of all undergraduates receive some type of aid, and the average total aid amount is $12,300.
2. My state has a very good public higher education system.
There are many very highly-rated state college systems, including those in California, New York, Florida, and Wisconsin, to name only a select few states. If a client is fortunate to live in a state that has a very good state higher educational program, great! Regardless, the costs associated with public higher education programs, even for in-state residents, might surprise you, as they have increased dramatically in recent years based on budget cuts and many other factors. According to 2017 data from The College Board, a public institution’s four years’ tuition, room & board, and fees will cost over $86,000 for in-state residents, and based on a 6% inflation rate, will cost more than $200,000 in 18 years. For an out-of-state resident, the cost currently jumps to more than $150,000, and in 18 years will cost over $360,000. Based on our prior discussion about financial aid, even public colleges will cost a lot more than the average financial aid package; so is this “low cost, state-based” response a valid one? I don’t think so. Are public schools more affordable than private ones? On average, yes, so taking a look at your in-state higher education system is a good starting point. However, there are many situations where attending a private institution is ultimately more affordable because of individual private schools’ financial aid policies and resulting lower net price.
3. The high cost of college no longer makes the value of a degree worth the price.
In addressing this reply, I will point back to that National Center for Educational Statistics, and The College Board. Before I do so, however, I invite you to actually do an online search on the matter: Type in, using your favorite search engine: “Is the cost of a college degree worth the expense,” or similar. WARNING: Before searching for an answer to this question, set aside a few HOURS of your time for reading both sides of this argument. You can find plenty of statistics and highly intelligent and well-respected points of view on both sides of this highly-charged topic. Those of us in the college savings plan 529 industry have been reporting for years that, when comparing two people, one with a college degree and the other without a college degree, the person with a degree will earn, on average, over $1 million more than a person without a degree over a lifetime. Having a college degree has also become more common than it was one and two generations ago, and career direction and earnings potential have a dramatic impact on how much value is derived from a college education.
4. We’re resigned to taking out loans to pay for college.
Loans, to a certain extent, are not a bad thing at all – think about it: many of us have mortgages, auto loans, etc. Used responsibly, loans help people leverage their assets, improve their lives, and as a result drive the U.S. economy. When thinking about college debt, however, which currently is more than $1 trillion, I’d suggest that these loans be avoided if possible. Think about the impact student debt has on someone graduating with an undergraduate or graduate degree: It delays, or in extreme cases makes impossible, other life events, such as buying a house, a car, getting married, starting a family, etc. Consider a college graduate who chooses a low-income profession: That person might earn a starting salary of say $25,000 and have $150,000 or more in student loans. Do you think those monthly loan repayments, will put a damper on that person’s lifestyle spending? Absolutely. Before a client resigns him/herself to solving the ‘cost’ problem by taking out loans, help them recognize the ripple effect this will have, perhaps for generations to follow, on their family’s future.
5. My kids’ grandparents have agreed to pay for college.
In theory, this response makes perfect sense; in reality, however, many things can, and oftentimes do, happen to derail this funding strategy. In short, life happens – people get sick, have accidents, and/or make a variety of financial mistakes leaving them unable to help out with paying those college expenses. Can grandparents, other family members, perhaps even friends, neighbors, and other sources can help with paying for college? Yes – but this should only be a part of the funding solution, not the entire solution.
6. We’re going to follow the ‘Junior college then transfer’ strategy.
Personally, I like this strategy quite a bit, but have you been keeping an eye on how many times this conversation changed since it was first introduced a few years back by former President Barack Obama? Because this is a political conversation in part, this conversation will continue to evolve – and this could be good or bad for any given client’s particular situation. On the surface, though, the reason I like this idea is because it keeps college costs down – way down in many cases. Here’s the general idea: Junior colleges are far less expensive, on average, than four-year institutions, so go there for two years at a greatly reduced (and sometimes even no-cost) price tag. Then, transfer to a four-year institution for the remaining two years, which will be the school being identified on your resume. Be sure that the two programs and schools are aligned, however, so that the ability to finish in four years is still possible. Otherwise, the value of this strategy will be reduced by the additional time spent, and expenses incurred, in school.
7. We’re trying to save for college, but we keep having emergencies / surprises affecting our strategy.
Life throws all of us curve balls from time to time, it’s inevitable. However, there’s a difference between a true emergency and a fictitious emergency, like the ‘necessary’ home remodel, emergency screen porch, or ‘great deal on the car of my dreams’ situations. Don’t let those non-emergencies be your go-to reason for not saving for college. Be disciplined, form good saving habits; in short, be your own financial best friend!
8. We save $100 per month per child, what more can we do?
When hearing this reply from a client, my first response is “Great.” And then I keep asking questions: How many kids are you saving for? How long have you been saving that amount, for each child? Has your income changed, recently or over the years? Encourage, encourage more, and encourage even more! Help clients dig into their budgets and uncover opportunities to see how slight adjustments to their spending and lifestyle can provide the means to increase their monthly savings amount to even higher levels. Perhaps even suggest that your clients automatically increase their 529 savings amounts by 1% or 2% automatically on an annual basis, like their 401k accounts.
9. We aren’t saving for college because we heard it hurts our chances for receiving financial aid.
The truth on this is the exact opposite of common discourse on the matter. Saving money is rarely, if ever, a bad thing; in fact, name one instance when saving money for future obligations turned out to hurt your, or your client, in the end. “Worst” case scenario? You have more money left over. What this reply is really addressing is HOW to save so that their financial aid profile is the least impacted. Remember: conventional, or traditional, financial aid is need-based aid, for starters, and there are many other types of aid available. Help your clients understand the way the financial aid formulas work. Most schools require students to complete the Free Application for Federal Student Aid (FAFSA), but many private colleges and universities also use the CSS Profile to determine institutional aid. It’s also important to discuss strategies to minimize the impact of 529 savings on financial aid, and the differences between policies at public versus private colleges. Don’t let a lack of knowledge and understanding of this admittedly confusing and complicated process derail the positive habit of saving.
10. We just don’t have the money to save for college.
Remind your clients that most 529 plans have very low contribution requirements, starting as low as $5 per month. For clients with little money to invest, perhaps you direct them to a direct-sold instead of an advisor-sold 529 plan, which typically has higher initial minimum and subsequent investment amounts. Then, down the road, as you continue to work with those clients, and their account balances and financial means hopefully increase, you can transfer or rollover those direct-sold 529 accounts (tax-free, by the way) to an advisor-sold plan. The most important thing is to get started right away. Each day a parents waits they lose out on potential savings and tax-free growth. You can use the Price of Procrastination Calculator to further illustrate this point to your clients.
Are you wondering why – not once, even – the word ‘tax’ has not appeared in this article? Do taxes matter? Absolutely. All that this article has been doing up to now is address client and prospect pushback to saving. Once you’ve helped those persons with education, using perhaps some of the information above, now it is time to share your financial expertise. Advise them, as your title implies, about the benefits of 529 plans: Whether it be the potential contribution-based tax deduction or credit available, the potential for tax-deferred (both at the federal and state levels) growth, or the ultimate tax-free withdrawal for qualifying higher education expenses, (and as of January 1, 2018, up to $10,000 for qualifying K-12 tuition), 529s are THE best way to save for future college expenses – let the taxes be the icing on the cake!