The stock market crash, plummeting real estate values and the credit crunch have created general-purpose anxiety for most CPA clients. But for those with children someday headed for college, that looming burden weighs particularly heavily.According to the most recent College Board survey, the average tab this academic year at a four-year private college is $37,390. And total expenses at four-year public institutions average $18,326 for in-state residents, and $29,193 for out-of-state students.
What can CPAs offer clients facing such daunting numbers?
Beyond sympathy, how about some original, as well as time-tested, advice? With both, though, CPAs shouldn't wait for clients to volunteer their worries. "Advisors must be proactive and reach out to their clients to talk about this topic," suggested Michael Eisenberg, CPA, PFS, of Eisenberg Financial Advisors in Los Angeles. "If you're doing tax returns, it's a great opportunity during the tax meeting. You've got the return in front of you. You know who their dependents are, and their ages."
"The bottom line," added Chuck Drawbaugh, of Rumson, N.J.-based College Funding Associates, "is people need to wake up and realize that nobody is going to bail them out when it comes time to pay for college. Too many people [have] their heads in the sand."
The sooner CPAs help clients extract their heads from the sand, the better, Drawbaugh added. Among the challenges that parents and college-bound students face - beyond the diminished state of their college savings portfolios - are:
* The prospect of continuing high college fee inflation. Over the past decade, annual tuition increases have exceeded the inflation rate by 2.4 percent at private colleges, and 4.2 percent at public institutions, according to the College Board. Most public institutions will be receiving less support from state governments in light of declining tax revenues, and therefore need to bridge the gap with higher tuition fees.
* Fewer scholarship dollars. Declining endowments and foundation portfolios are likely to lead to a slimmer pool of outright financial gifts, even to the most deserving students, Drawbaugh predicted.
* Tighter standards for college loans. As with real estate debt, credit criteria for college lending had loosened considerably in recent years. "People were getting loans who shouldn't have," said Drawbaugh. The fallout, however, will be a pinch even for more creditworthy borrowers, he predicted.
* Home equity may be limited. To the extent that parents had hoped to tap home equity as collateral for college funding, plummeting real estate values, at least in the near term, may preclude that financing tool.
As if those factors weren't troublesome enough, competition for remaining scholarship dollars - and even admission slots - will be intensifying in the years ahead as the demographic bulge of Baby Boomer children continues to crowd college campuses.
So what should parents and their offspring be doing to counter all of this?
If their financial behavior has been inconsistent with their upcoming obligations, the day of reckoning is certainly at hand, noted Drawbaugh. People who have relied too much on debt and not enough on savings need to receive - in a non-judgmental manner - a "back to basics" financial reality orientation.
One way to approach the topic is to let the U.S. Department of Education serve as the bad cop, he suggested. Drawbaugh explains to clients that in determining a student's eligibility for financial aid, that agency "will take a look at your income and what you should have been able to save over the years, knowing that your kid was probably going to go to college."
But he delivers a blunt message to parents who over-indulged in debt prior to the financial collapse: "People need to start clearing up their credit, and in a hurry - before they need to return to lenders to help college-bound children."
Randi Grant, CPA, the director of taxation and personal financial planning at Berkowitz, Dick, Pollack & Brant in Ft. Lauderdale, Fla., tries to soothe her clients' nerves by bringing them back to their original financial game plan. "We go back and take a look at our overall plan, goals and objectives," she said. "We decide where we're willing to take risks, and where we're not."
Well before the 2008 crash, however, Grant had steered some risk-averse clients to a FDIC-insured CD savings vehicle in the 529 plan sponsored by the State of Montana. That plan ties yields to college tuition inflation rates, she explained.
But her advice to clients whose nerves remain somewhat intact is "to continue on a strategy. If you were buying equities on a systematic basis, continue to do so."
Added Steve Goodman, CPA, of Goodman Financial in Houston: "We typically don't alter asset allocation models for market events. If you have an asset allocation model going in, it should be an all-weather allocation, because it's based on time frame and risk tolerance. In theory, if they're one or two years away, we have a substantial portion of that account in fixed income with maturities coming in time for any distribution needs that they have."
Goodman pointed to the popularity of age-based investment portfolios, with asset allocation models that shift over time, available in most 529 plans. At Fidelity Investments, between 70 percent and 80 percent of funds flowing into the 529 plan assets it manages go into the firm's age-based portfolios, according to Jeff Troutman, Fidelity's vice president of college planning.
Lately, however, "We have seen a surprisingly high number of exchanges going out of the age-based portfolios to the money market portfolios, particularly the longer-dated portfolios" with higher equity allocations, Troutman said.
Despite such redemptions, Fidelity hasn't made any significant changes to its portfolio models - yet. "Our allocations are strategic, not tactical. However, when the dust settles, and even now, we'll be looking at our methodology as to whether we have the right 'glide path.'"
Fidelity's "glide path" - the pattern of shifting allocations of college funding assets from aggressive to more conservative as the fund's target date nears - doesn't move in lockstep with other 529 plan age-based fund asset managers.
In November, a popular Web site dealing with college funding, www.savingforcollege.com, surveyed the asset allocations and glide paths of 529 asset managers and found significant variations among them.
For example, the survey shows that a Fidelity-managed age-based portfolio offered by California's 529 plan with a 2010 target date was allocated 33 percent stock, 40 percent bonds and 27 percent cash, whereas a different plan offered by Indiana's 529, with the same 2010 target date, also had a 33 percent equity allocation, but the remainder of the portfolio was invested in bonds. And an equivalent fund managed by Oppenheimer for Maine's 529 plan had a far more conservative 20/36/44 asset split.
"What is surprising," said Joe Hurley, CPA, founder of the Web site and author of The Best Way to Save for College, "is the degree of disparity, reminding us that you should review the target allocations before selecting a 529 plan to ensure that what you end up with is in line with the client's expectations."
No matter how wisely their assets are invested, however, the tax benefits of 529 plans - i.e., no federal taxation of interest and capital gains when plan proceeds are used to defray college expenses - do not make them a no-brainer planning tool in all situations, advisors say.
TAXES AND AID 101
For example, if a client opens a 529 plan close to the time when the child is headed for college, and funds are, appropriately, invested very conservatively, the tax benefit will be limited because interest income or capital gains will also be minimal. Yet once those assets are contained in the 529 structure, Drawbaugh warned that the flexibility to use them to meet other, perhaps unexpected, financial needs without penalty is lost.
Fee structures for 529 plans also need to be examined closely, he added. When they first came on the scene, many 529 plans featured rich fee structures. Competitive forces have led to a reduction in those fees, but high-fee plans remain, and advisors help clients avoid them, Drawbaugh said.
In addition, 529 assets are, naturally, factored into the assessment of students' eligibility for financial aid. If a student's financial profile when they apply to college appears modest enough to render financial aid a reasonable prospect, keeping assets out of 529 plans may prove helpful. Although he emphasized that parking assets outside of the line of vision of financial aid application reviewers often is not a winning strategy, Drawbaugh said that there are times when the approach makes sense.
"Families are going to have to be more creative in looking at coordinated financial planning, by looking at the major life events of the parents and grandparents," he suggested. For example, when the grandparents of the student are relatively young and healthy, purchasing insurance policies on their lives ultimately could work as a tax-efficient college savings vehicle, he said. Plan loans or, ultimately, a death benefit might make more sense than traditional saving approaches in some circumstances, Drawbaugh said. "Instead of living off the hopes that the market will earn a ton of money, maybe we should be looking at things we know are definite, even if it's a little difficult to talk about."
Outside the realm of asset-accumulation, college funding experts stress the importance of putting students on a path to become attractive to colleges that may be willing to lure them with financial aid. "Parents and students should understand that there are benefits to having good grades, including your ability to get aid," noted Goodman.
In addition, Drawbaugh pointed out that, contrary to popular belief, colleges aren't always looking for "well-rounded" students. Rather, many try to build a diverse student body by attracting students with specific skills and capabilities. Thus students "need to find ways to make their resumes stand out," he said, instead of merely dabbling in a myriad of activities.
Along similar lines, he urged clients to look beyond the roster of the most well-known - and therefore often the most competitive - colleges and universities.
Advisors also point out that community colleges are very affordable. At $2,402, the average tuition this year at public two-year schools was about 36 percent of that of four-year public institutions, and 10 percent of private colleges, according to the College Board. And that doesn't even factor in the savings associated with cutting out room and board charges.
Transferring from a community college to a four-year institution can save tens of thousands of dollars in tuition and other expenses, experts noted. In the past, some four-year state institutions didn't accept all credits from community colleges, but that's changing. In Ohio, for example, the legislature has mandated that all such credit be accepted, according to Jacqueline Williams, head of the state's Tuition Trust Authority.
And as advisors are helping clients get college funding plans on track, they often have to help them resolve financial conflicts between that goal and clients' retirement savings needs. "The reality is, parents have only so many more years of high income-earning potential to get their retirement fully funded," said Drawbaugh. "The kids have their entire work life ahead of them to deal with loans, if it comes to that."
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