The New College Planning Paradigm

For at least the past few decades, the standard financial planning prescription for college planning was to encourage families to save and invest regularly, preferably soon after birth, and to take advantage of account structures that offered either tax savings or potential advantages if the child may be a candidate for financial aid. The 2001 Tax Act (EGTRRA) made distributions from IRS Section 529 College Savings Plans for qualifying higher education expense tax exempt and made them the savings vehicle of choice for millions of American families.  By the end of 2013, the total value of 529 plan assets in the U.S. sat at $227 billion [National Conference of State Legislatures]. 

While those who have contributed to these plans are to be commended for their parsimony, as a practical matter, the unwavering mechanical march of tuition increases at nearly twice the national inflation rate has put the price tag of tuition at most private four year colleges (often $50,000+ per year) well beyond the reach of even the most diligent middle and even upper-income savers. Further, with most American families forced to choose between allocating resources to retirement and funding college, it is becoming more the rule than the exception for families with children in high school to have little or nothing saved for their post-secondary educations. 

As a result, a new, more sophisticated college planning paradigm is emerging in the financial planning community that strives to help families make a college education available to their children without burdening either parent or child with an insurmountable mountain of debt. This new paradigm involves a multi-faceted approach to education that often includes some mix of the following solutions:

-Working with high school guidance counselors to narrow the college search to those that offer the greatest price discounts from the advertised sticker price.  This is often done with the help of the Net Price Calculator. Guidance offices today also often have access to complex algorithms that can spit out a list of schools that may the best match for his/her family’s particular financial profile as well as provide useful insight into the likelihood of student’s acceptance at a particular institution.

-Consideration of state colleges and universities that offer significant tuition breaks for in-state students and consideration of colleges and universities that participate in regional tuition reciprocity programs.

-Upon acceptance to multiple institutions,  working aggressively with the respective financial aid offices to maximize aid packages and informing the institutions that total family contribution and debt will be a major factor in the matriculation decision.

-Seeking out and applying for scholarships and grant money.

-Maximizing federal student loans and planning in advance to have the student  participate in federal student loan forgiveness programs (e.g., Teach for America) after graduation.   Also planning in advance to take advantage of various federal loan income driven repayment plans after graduation.

-Borrowing from one’s 401(k) plan to keep private student loan debt to a minimum.  401(k) plan rules permit participants to borrow 50% of plan balances up to  a maximum of $50,000, and the money  must be repaid over 5 years on a fixed schedule.  While interest is charged on the loan amount, unlike all other loan sources, interest on the loan is repaid to their own accounts.  In many cases, families who borrow from their 401(k) to fund their children’s tuition, scale back on their salary deferral contributions in order to make their loan repayments.   The benefits of 401(k) loans have recently received attention in two Journal of Financial Planning pieces –

Benefits and Drawbacks of 401(k) Loans in a Low Interest Rate Environment

Are your clients making the right choice? 

Utilizing home equity lines of credit (HELOCs) as an alternative to higher interest private loan debt.  Additionally, as a means of shifting the HELOC burden from parent to child a number of peer-to-peer lending organizations have sprung up that facilitate formalized loan agreements between the parent(s) (and/or other willing friends or family members) and the student.  For more on this topic, see the following articles –

Peer-to-Peer Student Loans (Edvisors)

Have You Considered Peer-to-Peer Lending? (eStudentLoan)

Peer to Peer Education Loans (FinAid!)

In sum, while the college planning landscape has become far more complex and requires both parents and financial advisors to become more savvy and innovative, an array of strategies exist that should still enable willing and motivated students to obtain a four year college degree. For more on this topic, I also recommend reading NY Times Columnist Ron Lieber’s 2014 articles:

Eight Tips for Parents Who Have Saved Nothing for College

A College Financial Aid Guide for Families Who Have Saved Nothing