It’s too late for financial advisors to meaningfully impact college affordability for the high school seniors now anxiously anticipating admission decisions, but it’s not a moment too soon to help their younger siblings.
According to college consultant Lynn O’Shaughnessy of The College Solution, who works with both parents and financial advisors to help make college more affordable, the good news is that there’s plenty of room to add value for clients. The flip side, however, is that it is the ignorance of most advisors about college finance that creates that opportunity.
“Advisors, if they know anything, it’s ‘How do I save for college? Oh, a 529 plan,’” she told ThinkAdvisor in a phone interview.
“But once we’re past saving for college and we’re now paying for college, advisors are typically worthless. They have no clue how to help find schools that are more affordable to their client. More affluent families think they’re going to have to pay full price; but that’s not true,” she says.
The key metric advisors will want to familiarize themselves with is the EFC, or expected family contribution. "Get a preliminary EFC when the client’s kids are freshmen in high school,” O’Shaughnessy says. “If you’re looking for a more affordable school, the EFC should help drive this whole process.”
That is because the EFC will immediately point your client to the need-based vs. merit-based aid direction. A family earning just $23,000 per year has an EFC of zero; on the other hand, there is no limit to the EFC of the more affluent families whom financial advisors typically serve.
O’Shaughnessy tells of a wealthy family she has helped in Del Mar, Calif., whose EFC was $108,000 a year—far above the cost of even the priciest schools.
And even for non-ultra-high-net-worth clients, a family that earns even $150,000 could be looking at an EFC of $25,000 to $30,000—there are lots of variables that affect the precise calculation.
Since many such families would greatly value paying less than the full cost of college, advisors need to acquaint themselves with the basics of merit-based scholarships.
So an advisor’s first step will be to get used to working with an EFC calculator, which can be found on the College Board’s website.
“Advisors could do that with the clients' [present, along with their] previous year’s tax returns and investment account information. It’s easy,” O’Shaughnessy says.
“Advisors should know what counts and what doesn’t count,” she adds. “They screw up by putting retirement money into the formula…It’s only non-retirement money that counts. Most schools don’t ask about home equity lines of credit either.”
Besides the EFC, a second key point—back on more familiar advisor terrain—concerns 529 plans and clients’ changing views of them over time.
“People feel good putting money into those when their kids are little,” she says. “When the kids are older, they feel like the 529 is the enemy. They feel like the losers who didn’t put money into 529s are getting scholarships and we’re not.”
But O’Shaughnessy stresses that for the vast majority of families, a college savings plan “doesn’t hurt eligibility for aid by even a dollar,” she says.
The reason is an asset protection allowance in federal student aid guidelines that covers non-retirement money based on a formula.
So, for example, for the 2013-2014 academic year, a family where the older parent is 52 can exclude $43,100 from a 529 plan from calculating EFC. If that same family had saved $44,100, then they need only consider 5.64% of the extra $1,000 as part of their EFC.
“If advisors could tell people this, they would not worry about saving,” O’Shaughnessy says. “You’re much better off with savings than not when it comes to college since a lot of college money comes in the form of loans.”
So an advisor’s second action step is to access that table, on page 19 of the Department of Education guide, and print it out as a handy reference when advising clients.
Once the advisor has encouraged college savings and targeted merit-based scholarships for a high-EFC family, the final step for advisors is to calculate the net price of different colleges.
Colleges are now obligated to offer net price calculators, and advisors can view a range of financial data and perform net price calculations on the College Board’s site.
“Net price calculators tell families what the school’s going to cost after plugging in the student’s finances and academic profile. It’s the sticker price minus grants from the federal government, states and scholarships from schools,” she says.
An advisor serving families who wouldn’t qualify for need-based aid can quickly find the average merit-based aid for different schools through the site.
So for example, at Beloit College, where O’Shaughnessy’s son goes to school, the cost for tuition and fees and room and board (the data she recommends for calculations) is about $48,500 a year, but the school's average non-need-based aid totals $17,592, bringing the net price to just under $31,000.
Through the College Board’s tool, one could see that a comparable liberal arts college—Denison University—offers more generous merit aid averaging $18,421 but with more expensive tuition, fees and room and board of $54,670, the net price comes out to a much higher $36,249 than Beloit.
So all else being equal, a financial advisor could deliver $5,000 in annual savings, or $20,000 over four years, by steering a client’s teenager to Beloit over Davidson.
That kind of added value is easily but rarely accomplished, according to O’Shaughnessy. There are many additional angles to play, which she teachers in her various books and workshops.
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