Top 5 Things Clients Should Know About College

All of us have heard about the student debt burden being carried by college graduates—currently more than $1.2 trillion. At this point, we all know someone struggling to escape from under a mountain of student loans.
It’s an issue that can cause a burden to even the high net worth clients your firm works with. Private loans now make up more than 20% of all student loans—clearly, subsidized federal loans just aren’t cutting it and aren’t meeting the nation’s total need. The significant percentage of private loans suggest that even high net worth clients who don’t qualify for FAFSA are using high-rate private loans to cover college costs for their kids.
According to one recent survey, for instance:
27% of young grads find it difficult to buy daily necessities
63% are unable to make larger purchases like a car
73% have put off saving for retirement
75% said debt is preventing them from buying a home
This report’s most telling detail should serve as a huge red flag, Student loans were created to be an engine for social mobility, but they are, in fact, limiting young people’s ability to achieve financial success.
It is crucial to discuss and actively plan for college funding with clients. Here’s a few things that financial advisors can advise families to do.
Cash Flow. Talking about just writing a check to pay for college and fully understanding just how much those checks will amount to are two totally different things. Financial advisors should encourage clients to consider that their children’s college years may come during an economic downturn or a period of unemployment in the household.
College as an Investment. The cost of a college education should be considered the same way clients would consider a home or a new car. Encourage clients to ask questions about the cost of college—it fosters a healthy attitude that supports a wise investment.
Save Smarter. Financial advisors can suggest that clients save in a tax-advantaged account like the 529 college savings plan—where assets grow tax-deferred and qualified distributions are tax-free. If clients leave college savings in a plain savings or brokerage account, they’ll pay ordinary income tax plus the 3.8% Medicare surtax on any interest.
Should Children Contribute? Encourage clients to discuss college costs with their children early on. Will the kids have to foot part of the bill? If the student knows sooner, they may be able to prepare sooner and avoid impulsively getting student loans.
Talk It Out. Many clients with teenage children feel that they are not listening to what they’re saying—but it’s proven that financial conversations can make a difference with kids.
Rowe Price found that 58% of kids who have frequent discussions with their parents about saving for college say that they are saving for school on their own—opposed to 23% of kids whose parents do not frequently discuss college savings. This same study discovered that 81% of kids whose parents talk to them about investing say they are saving for college on their own.