While the cost of college has risen 30% in the past decade, financial aid has dropped by 25%, according to researchers at J.P. Morgan Asset Management.
The good news is that investment in 529 plans has tripled in the same timeframe, and there are some enhancements provided by Secure 2.0 that will be useful for advisors to share with their clients, Tricia Scarlata, head of education savings marketing at JPMorgan Chase, said yesterday during a webinar on the new tools, rules and opportunities financial advisors can find in education planning.
And if grandparents want to get involved so much the better, she said, because the need has never been greater.
“The reality is that college debt increases every day by $199 million,” Scarlata said. “So we just have to make sure that we're planning appropriately and helping our clients decrease their debt as much as they possibly can.”
Two big 529 enhancements recently came from Secure 2.0, the first of which is that employers who offer workplace retirement plans can apply the company match to the student loan payments employees are making, not just to dollars put into the retirement plan. This is particularly useful for younger clients. The other is the provision that will allow 529 contributions to be rolled into a Roth IRA on behalf of the beneficiary, with some limitations and going into effect in 2024.
“It's a pretty cool provision in that it provides potentially greater flexibility for families to plan for those what-if scenarios,” said Mike Conrath, chief retirement strategist at J.P. Morgan Asset Management. “It remains to be seen how widespread it will be utilized, but for those families who have not taken advantage of 529 because they're worried about the what-if scenarios, this is a great conversation starter.”
J.P. Morgan has a New York advisor-guided 529 plan that includes six asset allocation portfolios along with 18 individual single-asset portfolios to allow an advisor to offer clients a fully customized college savings solution. To this last group the firm has recently added a stable asset income option for clients very sensitive to market volatility but with higher returns than a money market account, said Joe Dionne, a vice president in JPMorgan's asset management group.
“As your kids get near the end of that glidepath or near the college tuition check-writing time, no one has an appetite for market volatility,” he said. “ I know because my son went to college last year—last semester, in the fall. When I was writing those checks and saw the balance—there's no appetite to see that volatility there.”
A four-year college education at a private college currently costs $230,290, and at an in-state public college the costs are $100,210, according to statistics from The College Board. For a student who is 10 years old this year, the projected future bill is $340,243 and $134,292, respectively.
Despite the high price tag, higher education degrees continue to hold value. The U.S. Census Bureau’s 2021 population survey showed that the average annual earnings for a high school graduate was $42,851. For graduates of bachelor’s degrees, earnings jumped 88% to $80,384. And for those who obtain a professional degree, it jumped 265% to $156,305.
In addition, Americans with college degrees are much less likely to become unemployed throughout the lifetimes, and if they do become unemployed they will have an easier time finding the next job than their high school graduate counterparts, according to the U.S. Bureau of Labor statistics.
“While financial aid is great, only .3% of students go to school for free. ... Remember to tell your clients this,” Scarlata advised, adding that the average financial aid grant is around $5,000, and the average scholarship is around $6,000. “Say a student got both—$11,000, when you're paying $60,000, $70,000, $80,000 a year, does not go that far.”
The best way to close the gap between assets and cost is to stop saving for college and start investing for college, she said, adding that too many parents are keeping their kids’ college fund in cash.
“I think we've all done a tremendous job communicating the benefits of saving for college. What we now need to do is convince a whole lot of people who have earmarked dollars for college to actually take that next step and invest,” she said. “The cost of college is going up, on average, around 6% a year. There's no way that cash is going to get you there. So we need to help these folks that are sitting in cash actually get invested and try to keep up with and even outpace tuition inflation.”
The tax-efficiency of 529 plans remains the best way to meet college expenses, and it can translate to tens of thousands of additional dollars over an 18-year timeframe as parents chip in regularly. But there’s a unique aspect to this tax efficiency within estate planning, Scarlata said.
A single gift to a 529 plan at birth can pay for all or most four-year college costs and the value is removed from the contributor’s taxable estate. For an individual this year the annual gift limit is $17,000, but the contributor can make five years of gifts in the same year, which would total $85,000. Invested over 18 years at 6%, that’s more than $242,000. And for a couple, everything is doubled, and the total at the end of 18 years would be $485,000.
“When you have clients who have assets and they're looking to reduce their estate, this is a perfect way for them to do it. What an incredible gift,” she said. “Maybe the kid won't think it's so much, but, gosh, the parents will. This could really create a whole legacy.”
What one shouldn’t do, under any circumstances, is use retirement savings to pay for college, even though one in five parents do just that, said Conrath.
While it’s true the money all comes from the same place ultimately, advisors who work with their clients to bucket the strategies so the goals are separate and distinct are the most successful, he said.
“While both goals are important, if it comes down to prioritizing, for many families it makes sense to prioritize retirement,” he said. “There is no such thing as financial aid for retirement.”
While Social Security is a cushion, it won’t be enough to cover monthly expenses for most clients, let alone their other lifestyle and spending needs, and every $25,000 that a client takes out of their retirement fund for college means a loss of $80,000 in retirement funds 20 years later, according to J.P. Morgan Asset Management statistics.
There also could be consequences from a financial aid perspective. While a retirement savings account balance is not factored into the federal financial aid formula, a 50% of a withdrawal for college can be considered income to the student two years after the distribution, Conrath said.
“The amount at which you fund these strategies is going to vary client by client, but it's important to have those goals separate and discrete, and running on a parallel track,” he said.