From the April 2006 issue of Wealth Manager Web • Subscribe!

College Credit

If you have affluent clients with teenage children, you might have noticed that they exhibit a certain weary resignation as the deadlines for college applications approach. These parents, who always knew that their chances for financial aid would be zilch, resign themselves to writing a string of large checks for the next four or five years.

Even for the ultra wealthy, the college outlay can sting. A student entering Harvard as a member of the Class of 2010, for instance, can generate a tab that easily reaches $250,000. Many investment advisors commiserate with their clients about the unwieldy expense, but they typically offer little else beyond a sympathetic shrug.

A sigh and a shrug, however, is no way to deal with runaway college costs. What many advisors don't appreciate is that their clients can, in many cases, dramatically shrink their kids' college tab--even if their net worth runs into the millions. Many tax strategies, including income and asset shifting, can reduce the higher-ed burden through indirect tax relief. And these approaches can be coupled with merit-aid strategies that will work even if a child isn't a 4.0 superstar.

Here's the bottom line: Investment advisors who understand tax and admission strategies can often help students obtain an education at an expensive private school for the cost of a far cheaper in-state public institution. And professionals who are capable of performing these Houdini moves are in great demand. With high-school graduation rates set to reach their peak in the next couple of years, parents are seeking experts to help them navigate their way through the bewildering choices in a highly competitive marketplace. This presents a wonderful opportunity for advisors who want to turn college planning into a specialty. What follows, then, is a rundown of proven approaches, as well as an accompanying guide that explains how a financial planner can become a college-planning specialist in just a few months.

Admission Strategies

One reason why the college financial landscape doesn't look so bleak for wealthy undergraduates is this: Colleges love them. These students have cash that their less fortunate classmates don't, and colleges are eager to give them price breaks to entice them onto their campuses. "There's a ruthless bottom-line logic driving this trend," suggests an analysis from the Education Sector, an independent educational think tank in Washington, D.C. "Poor students bring in far less net revenue than rich ones and do nothing to burnish an institution's status in the higher education marketplace."

You can see evidence of this phenomenon in a variety of sources, including data generated by the National Association of Student Financial Aid Administrators. During the decade ended in 2004, merit scholarships-- awarded regardless of a family's net worth--jumped from $1.2 billion to $7.3 billion, a 508 percent hike. In contrast, need-based aid increased only 110 percent, from $18.6 billion to $39.1 billion.

All this merit money makes a private college's official sticker price meaningless. In fact, the average tuition discount at private universities and colleges is an astounding 41 percent, according to Rick Darvis, CPA, a principal at College Funding Inc. in Plentywood, Mont. and a co-founder of the National Institute of Certified College Planners (NICCP), which provides training and certification for investment professionals. Using this average, a college would slash $13,120 off tuition of $32,000. The key is knowing that this cash is there and positioning for it. "The golden rule is this: If you don't ask, you won't get the money," Darvis says. And he adds, "You should never assume that you won't get any."

Pocket the discount. The best way to insure a discount is to narrow the search to schools where a student's SAT or ACT test scores will place him or her in the top 25 percent of kids applying to that particular school. You can get an idea of what scores a specific college expects by visiting the Websites of The College Board or The Princeton Review. Both sources list the SAT and ACT scores for the middle 50 percent of first-year students at thousands of colleges. For example, high school seniors in the middle of the pack, who were accepted into Pepperdine University in Malibu, Calif., earned a verbal SAT score ranging from 550 to 650 out of a perfect score of 800. Their typical math scores ranged from 560 to 660. Consequently, if a student did better than those applicants, he or she would likely snag a discount.

Ivy League schools, however, rarely play the merit aid game, reserving most of their grants and scholarships for middle-class and underprivileged students who qualify for financial aid. The attitude of a Stanford or a Yale is that the ultimate reward for wealthier students is the fat acceptance package that they find in the mail. Al Hoffman, who provides back-office support to financial advisors through his firm, College Funding Service Center in New London, Conn., says parents shouldn't get hung up on status. "Swallow a dose of humility and pick colleges where a student has an opportunity to excel as opposed to picking an elite college for the name recognition. The master and doctorate levels are where elite colleges bring more to bear."

You can get a rough idea of how generous schools are with their discretionary merit money by looking at a school's profile on The College Board's Website and clicking on "Cost & Financial Aid." Scroll down, and you'll discover the school's average "non-need based aid." The average merit packages at Kenyan College and Oberlin College--two excellent liberal arts institutions in Ohio--are, respectively, $13,085 and $11,495. On the East Coast, such highly regarded schools as Boston College and New York University cut tuition for their best students by roughly $10,085 and $7,020 respectively. According to the College Board, Pepperdine beats all these competitors with a typical merit package of $21,569.

Don't overdose on college applications. A child could actually hurt chances for admission and merit aid by knocking on too many doors. To plenty of parents and teenagers, this will seem counterintuitive; they figure that more applications boost a kid's chances. Colleges, however, don't like competing with too many other institutions because it increases their own rejection rates, which are published online and in print in a variety of college resource guides. It's best to apply to only six to eight schools. Another way to play the admissions game is to look for schools which have lower enrollment yields. For instance, a school that admits 1,000 students but received acceptances from only 200 has a 20 percent yield, which is low. Higher yields are in a range from 50 percent to 60 percent. Lower yields typically result in fatter merit awards, which can be used as leverage with other schools.

Explore other time zones. Admissions officers get excited when they receive applications from faraway places. Plucking enough kids from Nebraska, Texas, Oregon and other distant states, for example, can help a New England campus boost its diversity. "California kids," Darvis says, "are in hot demand everywhere in the U.S.--except the West." Gary Carpenter, CPA, a principal at College Planning Services in Syracuse, N.Y., and the executive director of the NICCP, used this strategy and others for his own son, who applied to schools in Virginia, West Virginia and Washington state, as well as two in New York. Carpenter also made sure that his son applied to an in-state school--State University of New York at Albany--because private schools are more likely to award money if they know that the competition includes a relatively inexpensive alternative. Carpenter's son won merit awards at all the private schools and ultimately chose to attend Hartwick College in Oneonta, N.Y. "If we had not done any planning at all, we would have had a big college bill," Carpenter says.

Play on rivalries. Even students who hate sports should make sure they apply to two schools sharing the same athletic conference. Why? Schools that compete on the same ball fields fiercely compete for other kinds of students, too, such as a gifted violinist, a painter or a computer whiz. If a child is eager to attend Grinnell College, a highly acclaimed liberal arts institution in Iowa for example, he or she will want to consider applying to another school in the Midwestern Conference, such as Ripon College in Wisconsin or Lake Forest College in suburban Chicago.

Taxes and college

Luckily, tax strategies aren't dependent on whether a child is a good test taker or an honor student. Whether or not a college hands a student a merit award, parents should look to Uncle Sam for what Darvis likes to call "tax scholarships." Obviously, the Internal Revenue Service doesn't distribute scholarships, but a smart advisor can steer a family to a variety of tax write-offs and deductions that can significantly diminish the college burden. Ultimately, it shouldn't matter to parents whether they get a tuition break from a college or a tax break from the IRS.

While many families can use tax moves to reduce their IRS obligations, it's those who won't qualify for financial aid that enjoy the most options. "If a family won't qualify for financial aid, then it's really a freeing feeling since they don't have to worry about 2,100-plus pages of financial aid rules," says Deborah Fox, who is the principal of Fox College Funding in San Diego. "They should rely instead on doing cash-flow planning using tax strategies so they can pay for a good chunk of college on a pre-tax basis."

Most parents, as well as their advisors, never contemplate tax relief for their college obligations because they don't stop to consider what type of dollars they are using to pay the tab. Tax strategies are particularly important to the wealthy because the amount of money a family must earn to pay for college is higher. If a couple is in the 35 percent tax bracket, for instance, the cost of college--using after-tax money--is 35 percent greater than the actual expenses. Suppose, for instance, that the total cost of an elite university is $180,000. When college is paid with after-tax dollars, the real price for families in the 35 percent bracket is $276,923.

With a college planner's help, parents should--ideally--focus on reducing the tax costs of saving and spending those college dollars. Even better, parents should use pre-tax dollars whenever possible. Some strategies can be used by any affluent family, while others will only be practical if a family owns a business or rental property. Here are some of the strategies:

Income shifting

One of the most common tax strategies involves shifting income from parents or grandparents to a high school or college student. Financial-aid formulas penalize families if a child has assets in his or her own name, such as through custodial accounts. But when aid isn't an issue, transferring assets can slash a family's tax bill. This can be accomplished easily if a family owns its own business. Rather than using the family's income to pay tuition at a higher tax rate, the family can pay wages to the child who will utilize his or her standard deduction and low 10 percent tax bracket.

It's also possible to shift income from businesses to children. Using this approach, a family can gift S-Corporation stock and interests in a limited liability company or family limited partnership to a student. Nonqualified stock options and incentive stock options can also be used to transfer income to children at their capital gains rate.

Shifting Assets

If families are going to use appreciated stock or other assets to pay the college tab--and they won't qualify for financial assistance--it will often make sense to gift the appreciated assets to the child if he or she is at least 14, the age when the so-called kiddies tax disappears. The child can then sell the asset and trigger a lower 5 percent capital gains rate. "In general, the strategy should be to defer all investment income to college years to take advantage of the education tax credits," says Darvis, who is the author of College Solution, A Roadmap to Selecting Your Best Strategy to Fund College and Retirement...Without Going Broke.

Using education credits

Most advisors have probably heard of the Hope and Lifetime Learning credits, but many don't appreciate how versatile they can be. Even CPAs, who believe they have a handle on the basic college taxation rules, may be surprised at how they can be used, says Dan Claffey, one of the creators of Franklin Templeton's 529 plan and now a principal at EdMD, which specializes in education funding strategies in the San Francisco Bay Area. "Most CPAs become familiar with the credits but only from the standpoint of what the limits are and who doesn't qualify. They don't look at it a second time." On the surface, both these credits--which provide up to $3,500 in direct tax relief--would appear useless to wealthy clients because of income qualification. But the credits can be used by a student to offset stock sales or other assets if he or she is no longer a tax dependent, which may be advantageous to a family.

Employer Education Assistance Plan

Once a student reaches his or her 21st birthday, a Section 127 plan can be a smart idea for a family-run business. The plan, named for its place in the Internal Revenue Code, allows a student to become an employee and receive up to $5,250 per year for higher education costs. The business gets a tax deduction and the benefit to the child is tax-free.

Charitable Remainder Trust

Using a CRT to help pay college bills can be especially attractive to philanthropic grandparents, who want to simultaneously help a child or grandchild and a favorite charity, while reducing their potential income and estate taxes. Darvis provides an example of how a CRT could work in this scenario: Suppose grandparents own stock worth $50,000 with a tax basis of $5,000. The grandparents contribute the stock to a four-year CRT and gift the annual income interest of $6,000, based on a 12 percent return, to their grandchild who uses it for college. The grandparents also make a gift of roughly $20,000 to the child of the present interest in the CRT income interest. The grandparents avoid paying taxes on the stock's appreciation, and they receive a charitable income tax deduction of roughly $30,000.

The key point to remember is that there are many options and strategies. Financing college, it seems, is an education in itself.

Lynn O'Shaughnessy ( is a financial journalist and former reporter for the Los Angeles Times. She is the author of the Retirement Bible and the Investment Bible (both Wiley).

[sidebar] Making the Grade

For families with teenagers, the statistics are intimidating. During the past 30 years, college costs have been rising 5 percent to 8 percent annually. And the number of high school graduates continues to soar--2.1 to 2.5 million are expected to enter college this year. At the same time, however, the number of colleges, at roughly 3,000, has remained pretty much static.

For financial professionals, these numbers represent a huge opportunity. Parents who seek out college experts are extremely motivated and grateful.

"If you understand college planning, it will separate you from millions of other financial planning services," suggests Rick Darvis, of College Funding Inc and one of the founders of the National Institute of Certified College Planners (NICCP). "Retirement planners, tax planners, estate planners are a dime a dozen; they are on every street corner. But college planners are a scarce commodity."

If the college niche intrigues you, an obvious first step is to take online classes through NICCP. Successful graduates of the course earn the designation Certified College Planning Specialist (CCPS). Since the Institute was created in 2002, 460 people have been certified, with most coming from the CFP and CPA ranks. To receive the designation, you must complete three modules that cover paying and saving for college, as well as advanced college-funding strategies. You must also meet continuing education requirements. The cost of the three online modules is $1,185.

But you can't expect to become an expert in college planning simply by earning a CCPS, warns Stuart Siegel, who was one of the original CCPS designees. His firm, College Tuition Solutions Inc., in Erie, Penn., provides back-office support for professionals. One of the mistakes he's seen newcomers make is taking on less desirable clients because they are unsure of their skill level. "The purpose of this business is to attract viable financial clients, but they will go out and take people whom they wouldn't look twice at normally because they don't fit their profile."

Advisors in this niche choose different ways to charge clients. On the two coasts, families often pay an initial fee for a college plan and then are assessed a monthly charge. Others assess a one-time fee or provide the service gratis if a family invests enough assets through them.


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