Last year, President Obama caught a lot of flack, particularly from the middle class, for proposing to eliminate tax-advantaged 529 college savings plans. But although he backed off and 529 plans dodged a bullet, they aren’t being utilized as frequently as they should be.
According to the report “How America Saves for College 2015” from Sallie Mae, just 27 percent of college savers are using 529 college savings plans. Among the nonusers, just 4 in 10 parents report being aware of these plans.
Advisors can play a key role in helping families understand how to better leverage these tax-free investment vehicles, says Nancy Farmer, president and CEO of Private College 529 Plan, the nation’s only pre-paid plan for private college tuition.
“RIAs and FAs can best educate clients by first understanding the family’s hopes for their children or grandchildren,” she says. “That opens the door to estimating the costs and helping families work through cost calculators to put numbers to their aspirations.” Conversations should include when the kids will matriculate, she says, and the types of schools they’re considering (public or private, big or small).
With these questions addressed, it’s then easier to discuss how much a family needs to save, their ability to save and the different savings vehicles available. Advisors should also encourage clients to start saving as early as possible so they can take advantage of compounding, to enroll in automatic savings plans and to adjust their contributions as life’s circumstances permit, says Farmer.
For example, when a child no longer needs diapers or daycare, some money that went towards those expenses can be put into college savings, she says. “People should also consider using at least a portion of their tax refunds for college savings,” she says, “and encourage relatives to contribute to college savings for gifts, rather than toys that have a short lifespan.”
Wil Smith, director of wealth management at Crown Wealth Management in Costa Mesa, Calif., encourages clients to consider not only 529 college savings plans but also prepaid college tuition plans, including the Private College 529 Plan. Prepaid plans allow families to save for college tomorrow at today’s costs.
“If tuition rises 6 percent to 7 percent a year, it’s kind of like you’re guaranteed a rate of return of 6 percent to 7 percent,” he says, “and you don’t have to account for market fluctuations.”
Opening a 529 plan isn’t always the best option. Parents with a child nearing college age recently approached him “all hot to trot and ready to go with a mutual fund 529 plan,” he says, but it didn’t make sense given their late timing and the sales charges. Municipal bonds could be a better way to capture tax benefits if a child is just a year or two away from college, he says.
Smith walks clients through the Free Application for Federal Student Aid (FAFSA). The FAFSA can open doors for school grants and federal grants even among more affluent families, he says. He also encourages students to seek scholarships, noting that sometimes there are more available awards than applicants.