Education planning emerges as a new niche as more clients need help with complex issues
Once an ancillary part of the financial planning
process, saving for college has become an increasingly complex area
that some advisors have nurtured into a specialty. Advisors point to
the low-return market, tightening financial aid availability and
college tuition increases that continue to outpace the general
inflation rate as the reasons clients are looking for help.
Added into the mix is the fact that advisors have
available to them a myriad of planning and investment techniques in
trying to trim their clients' college tuition bills as much as
possible. "I believe saving for college and retirement at the same time
is possible if you understand the matrix," says Troy Miller, an
LPL-affiliated advisor in Gold River, Calif. "There is a bunch of us
out here studying this stuff."
The rise of college planning as a subspecialty in
the planning field was underscored in 2002 by the creation of the
National Institute of Certified College Planning (NICCP) and its
Certified College Planning Specialist (CCPS) designation. Not
coincidentally, the institute was started about the same time that 529
plans became popular among investors looking for a tax-advantaged
vehicle for college saving.
The NICCP currently has 542 advisors with the CCPS
certification and more than 300 other members who are working toward
their certification, says Gary Carpenter, the institute's executive
director and owner of College Planning Services, an advisory firm
specializing in college planning in Syracuse, N.Y. Among the toughest
issues college planning specialists are grappling with, he says, is
balancing a client's retirement and college savings goals at a time
when market returns are low and college cost escalations continue to be
relatively high.
Advisors also note that the difference in price
between public and private colleges can be stark, with the cost of some
private schools topping $40,000 per year. "Many clients will have a
smile on their face if their kid is thinking of going to a public
university," says James Holtzman, a financial advisor with Legend
Financial Advisors in Pittsburgh.
In 2005, for example, the college costs portion of
the Consumer Price Index rose 7.46%. The general inflation rate, by
comparison, was only 3.39%.
A rule of thumb, planners say, is that you can
expect the college rate of inflation to be at least twice the general
rate of inflation in any give year. In some years it can be higher,
such as in 2002, when the ratio of the college to general inflation
rate was 4.32. Sometimes clients will be hit with even higher
increases-when they least expect it.
Jeffrey Daniher, a partner with Ritter Daniher
Financial Advisory in Cincinnati, notes that Ohio recently raised
tuition at its state schools by about 11% after imposing a cap on
increases in previous years. That's why the firm tries to devise plans
that can deal with a "worst-case scenario," he says.
This is impacting more than just the ability of
clients to send their children to their dream school, advisors say.
It's also impacting the future of the clients themselves-particularly
middle-class families-who sometimes will go as far as cutting back on
401(k) contributions or borrowing from their retirement accounts to pay
the tuition bills.
"It's getting more expensive-there is no two ways
about that," Carpenter says of the bills parents are facing as they
prepare their children for college. "I think the real impact to this
whole thing is college is so expensive it's really impacting the
retirement of a lot of families," he says, adding that he always looks
for alternatives to touching retirement accounts when tackling college
costs. "As a planner, I tell my clients that if you take money out of
your retirement account, you're probably never going to put it back."
That's why, in practically all discussions about
saving for tuition, advisors say they first want to establish that
their clients are on sound footing when it comes to retirement. "I
always advocate that they have their retirement situation settled
first," says Cheryl Costa, principal advisor with Family Financial
Architects in Natick, Mass. "We want to make sure they have an adequate
amount saved and are able to continue future contributions."
J. Patrick Collins, principal of Greenspring Wealth
Management in Towson, Md., notes that it's easier to scrape together a
college plan at the last minute than a retirement plan. "Our advice is
that there are a lot of ways for a child to be in college, but not a
lot of ways to retire," he says. "There is no loan or grant scholarship
for a client who wants to retire."
Client situations vary, advisors say. Cases can
range from those of affluent clients who are looking to save through
the use of gifting, asset shifting and merit-based financial aid, to
middle-income families who may need a combination of savings, loans and
financial aid to send their children to the school of their choice.
The CCPS program curriculum reflects broad issues
involved in college savings planning, with three main components, says
Carpenter. The first relates to the complexities of financial aid,
including the differences between need- and merit-based awards, what
client assets count against aid calculations and the proper way to
complete the necessary forms.
The second CCPS module focuses on specific planning
strategies, including the use of 529 plans, Coverdell Education Savings
Accounts, custodial accounts for minors and the Lifetime Learning
credit. The last part of the curriculum looks at advanced strategies
for parents who do not qualify for financial aid, including gifting,
income shifting and tax-advantaged ways for other family members to
contribute.
Just as with investment management, however, college
planning can encompass a broader roll for advisors. Brett and Dave
Wilder, a father-and-son team that runs Financial Management Group in
Cincinnati, start working with some clients' children as freshmen in
high school.
Working with affluent clients who typically don't
qualify for needs-based financial aid, the Wilders help students
identify the colleges of their choice. After acceptance letters are
received, the advisors will then try to negotiate for better
merit-based financial aid on behalf of the student.
It's a role the advisors took on as they began to
realize, through their work in college planning, that colleges are
basically businesses competing with other schools. "They have revenues
and expenses and have to manage the best way they can," says Dave
Wilder.
It also means that colleges are willing to compete
with one another for students they want, either because of outstanding
academics or the diversity they bring to the student body, he says. The
Wilders advise all their clients to apply to as many schools as
possible-at least eight to 12-with the intent of playing schools
against each other once the acceptance letters are received.
If, for example, a student's top choice provides a
financial aid package that is inferior to the student's second or third
choice of schools, the Wilders will point out the discrepancy in a
letter to the top choice's financial aid office. The written appeal,
Dave Wilder says, will often prompt the student's favorite college to
up its financial aid offer. Last year, for example, one student
received an additional $10,000 in aid because of such a letter. "Some
schools will state right out that they never do this, but they actually
do," he says. "It's not a formal process at all."
Wilder notes that this appeal process is only used
for private institutions, as public colleges are usually too
cash-strapped to engage in student bidding wars.
Advisors say another reason college planning has
become a specialty is because the area has grown more complex. As the
options for tax-advantaged college saving has increased, they say, so
has the frequency of rule changes.
This year, for example, advisors will have to keep
up with an assortment of tax law changes, some of which are expected to
make 529 plans more attractive to investors. The change with perhaps
the largest impact is the treatment of the "kiddie tax" in the Tax
Increase Prevention and Reconciliation Act of 2005.
Under the law, the age limit of the "kiddie tax" was
moved from 14 to 18 years old. That means, up until the age of 18, all
investment income earned by the child above and beyond $1,700 is taxed
based on the parents' tax bracket. Previously, the kiddie tax vanished
upon the child reaching age 14.
This, advisors say, could have a profound effect
upon college saving strategies that involved shifting assets and income
to children aged 14 and older to take advantage of the minor's lower
tax bracket. Advisors note that many UTMA and UGMA custodial accounts
in existence now-and set up specifically to take advantage of the
beneficiary's lower tax rate- suddenly are going to be subject to a
higher tax bracket. "This is certainly going to have a wide impact on
virtually everyone saving in UTMA/UGMA accounts," says advisor Michael
Kitces of Pinnacle Advisory Group in Columbia, Md.
Another change that could help propel the 529 Plan
market-which hit a record $75.1 billion in assets at the end of the
first quarter-is a rule change in the Deficit Reduction Act of 2005
that treats prepaid tuition 529 plans as assets of the parent.
Previously, such plans were considered assets of the child and were
considered dollar-for-dollar against the child's financial need
eligibility.
Under the new tax treatment, the assets will be
counted six cents against the dollar as assets of the parent, which is
the way 529 savings plans have always been treated. "From a strictly
financial aid point of view, the 529 plan has a little more merit to be
used for college funding in that it is now an asset of the parent,"
says advisor Michael King, a senior partner with the Genesis Group in
Brentwood, Tenn.
At the same time, the deficit reduction law will
shift more burden onto the families of college students who use
government subsidized loans. Among the changes in the law, Stafford
loans disbursed on or after July 1 will have a fixed interest rate of
6.8%. The loans previously had a variable rate that was at 4.7% last
year, according to Carpenter.
Similar changes are in store for Federal Parent
Loans, which will carry a fixed rate of 8.5%. "Things are becoming more
expensive on the loan side," Carpenter said.
As they incorporate new tax laws into their
strategies, college planners are also awaiting some finality when it
comes to 529 Plan withdrawals. Under current law, the federal tax
exclusion for qualified withdrawals from a 529 plan will expire at the
end of 2010. No action has yet been taken to guarantee the exclusion
beyond that year.
"I think it has had an impact on sales, although I
can't say how much," says Jeff Coghan, director of 529 Plans for The
Hartford. He noted that if nothing changes, the class of 2006 would be
the last to enjoy the withdrawal exemptions for four years. "We feel
strongly that because of the interest in education and consumer
interest in 529 plans that we should see some action on that portion of
the bill."