A new football playoff system isn’t the only change that college students and parents will notice for the 2014 school year.

Lawmakers have also enacted changes that affect how parents save to send their children to a post-secondary school.

Among the highlights:
• The federal American Opportunity Tax Credit has been extended through 2017.

• Arizona, Nebraska and Iowa all increased the state income tax deduction their residents may take for contributions to a 529 plan, but North Carolina terminated its deduction.

• Montana joined Arizona, Kansas, Maine, Missouri and Pennsylvania in offering tax deductions even if their residents invest in another state’s plan.
Financial advisors know their clients have to save the equivalent of a condo mortgage to pay for a four-year private school. They can take some comfort in telling clients they will continue to get a tax break through the American Opportunity Tax Credit, which Congress voted to preserve for another four years.

Parents can claim an annual tax credit of up to $2,500 per dependent child, according to Terry Griffith, a financial advisor with Morgan Stanley in Waltham, Mass. “Parents may claim the credit only if the student is not claimed as a dependent on another person’s tax return,” he says, noting the credit phases out for incomes between $80,000 and $90,000 or between $160,000 and $180,000 for married taxpayers filing jointly. “The credit is allowed only for students who attend a degree program at least half time and who have not completed their first four years of study before the beginning of the taxable year. It cannot be claimed in more than four tax years for any one student.”

Unfortunately, some parents are discovering the cost of poor tax planning for their tuition bills. Some affluent families are using current income to pay for college instead of tax-advantaged 529 plans, according to a survey released last year by Legg Mason. Another study by Fidelity Investments showed that parents who were surveyed reported saving an average of $5,000 for a student’s education in 2013.

Tuition, fees, room and board at public four-year institutions total $31,701 for this school year, and private schools total $40,917 for out-of-state students, according to the College Board. Both numbers increased less than 4% from the previous year.

Financial advisors often must tell parents they have not saved enough for their child to attend a top-tier university. However, their disappointment could have been avoided if advisors had proactively talked to their clients about planning for college early.

“Good planning is just as important as good investing,” says Brian Pierson, a director at Convergent Wealth Advisors, a Washington, D.C., wealth manager. “Comprehensive wealth planning includes college savings, investing, insurance, taxes and estate gifting. If you are only focused on investing, you are missing some opportunities to provide your client with financial security.”

The cost of four years for an out-of-state private school—if there is a 6% tuition inflation—could reach $550,000 for an 18-year-old in 2032, according to Paul Gaudio, a wealth planner with PNC Wealth Management in Princeton, N.J.

One tactic to consider is grandparent giving, in which each grandparent can gift to a grandchild up to $28,000 a year for five years or $140,000 per couple, he says. “It’s a great estate planning vehicle for grandparents,” Gaudio says. “When you put that money into 529 plans, that money comes out of your estate, provided that if forward averaging was elected, that period has lapsed.”

However, grandparents need to time their gifts for maximum advantage, says Matt Golden, vice president of college savings for Fidelity Financial Advisor Solutions in Boston. “One of the things we have seen is that advisors are getting savvier about working with grandparents,” he says. “Think about using those savings from a grandparent for the junior and senior year so it does not impact any financial aid that the student may be getting.”

Income—not savings—is the most important factor in determining eligibility for financial aid, he says. Parents and advisors also should include children in planning for college by the time they reach the freshman year of high school. “Students need to be better educated, not only about selecting a college and major but about how taking out loans can impact their debt when they graduate,” Golden says.

A Fidelity study of recent college graduates found that 70% are carrying college and personal debt averaging more than $35,000.  “Our experience is that often students are graduating with $60,000 to $80,000 in debt,” says Charles Wareham, a financial advisor with LPL Financial in Hartford, Conn. “The financial aid system is not designed to support a Boston College level of funding. It is designed to support a community college level of funding.”

Boston College’s room, board, tuition and other expenses exceed $58,000 a year, according to the College Board. Wareham says he provides college funding presentations at high schools. These presentations are well-attended by parents, who often have misconceptions about how financial aid works.
“Parents have a recollection of what financial aid looked like 25 years ago, and it looks nothing like that today,” Wareham says. “They think Uncle Sam will show up with wheelbarrows full of money, and in most cases it’s just not going to happen.”

The Guaranteed Student Loan program has been replaced by the subsidized federal Stafford loan program. But parents are shocked that college freshmen can only qualify for a maximum of just $3,500, Wareham says. Families can also qualify for up to $2,000 in additional unsubsidized Stafford loans and possibly another $2,000 a year if the student enters a work-study program.

Students can also turn to some state programs for loans. In Connecticut, for example, families can apply for the Connecticut Higher Education Supplemental Loan Authority (CHESLA) program. “The majority of loans will be a co-borrowing situation with parents, and the interest payments start pretty much right away,” Wareham says.

Many advisors believe there is no money to be made from providing counsel on college savings. “What they might not realize is that if we take care of parents at this urgent and critical time of their lives, that we can form fantastic relationships that lead to the other money management opportunities,” he says.

Advisors should also tell parents of older children how to efficiently use Uniform Transfer to Minors Act (UTMA) accounts, says Lesley Draper, a wealth advisor for RegentAtlantic Capital in Morristown, N.J. “If you already have a UTMA account, use those assets first,” she says. “Once a child turns age 21, some custodians will freeze that account until it’s retitled in the child’s name. At that point, children could use the funds to buy whatever they want, like a car.”

UTMA and Uniform Gifts to Minors Act (UGMA) accounts are no longer in vogue for college savings because of restrictions and tax disadvantages compared with 529 plans, advisors say. The 529 plan distributions are tax-free for qualified education expenses and can be rolled over for another child if all of the funds are not spent.

Some parents use deferred compensation plans to pay for college, according to Draper. “For clients who have not had a lot of discretionary income in the past, it is income taxable to the parents, so we sometimes pair those with college expenses,” she says. “I see plenty of parents who have not saved for college, so they have to pay out of their cash flow, and that is one way to do it.”

Draper considers the cost of 529 funds for clients as well as allocation and the age band of life cycle funds, which become more conservative and switch to fixed-income investments as the child gets older. “If you are spending a lot of fees on the investments, that will eat into your returns,” she says. “Typically, we choose the age bands for clients with moderate allocation or aggressive funds.”

 Parents can also set up Coverdell Education Savings Accounts. However, contributions must be coordinated among contributors because they are limited to $2,000 per beneficiary, according to Holly K. Nicholson, a certified financial planner for Financial Planning Services Inc. in Raleigh, N.C.

Parents’ adjusted gross income cannot exceed $95,000 for a single filer or $190,000 for couples filing jointly to contribute the maximum amount to a Coverdell. “If your AGI is too high, you can gift to someone with a lower AGI, and they can contribute to the Coverdell,” she says.