Older Parents, Younger Children

But 529 plans may come with drawbacks for older parents. “You can’t use them for emergencies or retirement without penalties,” Darvis says. “Some colleges treat distributions as income or resources and reduce aid on a dollar-for-dollar basis. [And] 529s can come with high fees. Withdrawals and some contributions are taxed. Worst of all, they have performed poorly. The last time I checked, 529 plans on average were off 40% from mutual funds.”

Parents close to retirement may be better served using traditional IRAs or Roths for educational and retirement savings.“I love Roth IRAs for all ages,” Sullivan says. “They aren’t included in the [estimated family contribution], and if you’re older than 59 and a half, you can withdraw at any time without penalty. Older parents need that flexibility.”

IRAs have stricter contribution limits than 529 plans, and lack some of the associated tax credits. “With 529s, distributions should be coordinated with tax credits,” Riskin says. “People often over-withdraw and negate the tax-free growth. If they take advantage of the American Opportunity and Lifetime Learning tax credits, 529s become the better deal.”

Darvis advocates whole term life insurance as a savings vehicle. “I tell clients that there’s three things that can prevent their kids from going to college: death, disability and lack of savings,” Darvis says. “The only instrument that covers all of those things is life insurance.”

But 529s have yet to catch on. According to the U.S. Government Accountability Office, less than 3% of families use the plans. In a recent Edward Jones study, 66% of respondents failed to identify 529 plans as college savings tools.

Sullivan says it’s more than a savings issue. “Parents and teenagers are making emotional decisions; it can lead to people bankrupting their future,” Sullivan says. “Clients have to think realistically about what can be afforded, and then they need to talk to their children.”

Advisors may have to temper clients’ lofty expectations.

“I ask clients to give me the names of three colleges,” Garcia says. “The first one would be the high-level, shoot-for-the-stars college. The second might be a favorite school of the family or the child. The third would be a local state school. I analyze the cost expectations on their child’s matriculation date. We ask, based on the analysis, which would be realistic. Then we shoot for that school.”

Orsolini retells a recent story about an Alabama student accepted by all eight Ivy League schools. “His sister is in school, he got some need-based money for the Ivies,” Orsolini says. “But his family realized that when his sister graduates, it would change the [estimated family contribution] formula and school would cost a lot more. So he ended up attending the University of Alabama. The kid is going to be fine no matter where he goes.”

No matter what age clients are when they start families, time heals most wounds. “In reality, there’s only three rules to successfully saving for children’s college: start early, start early and don’t forget rules one and two,” Garcia says. “If clients start early enough, they won’t have to worry about tapping their retirement accounts.”