Advisors don’t need to be reminded how much of an expenditure paying for college has become for their clients. We’ve all seen examples of how college bills can damage a family’s nest egg. Advisors need to realize that college planning is retirement planning. How parents pay for college will have a significant effect on when and how they will be able to retire. After all, for every $100,000 parents spend on educating a child, there is that much less money available to compound over time for retirement. The parent’s retirement fund is robbed of approximately $300,000 if one considers the loss of being able to invest that $100,000 at 8 percent over 15 years — and that’s only taking into account one child’s cost of education!
I know from first hand experience the feeling that dogs many parents as they watch a bright student progress through school. As our high school junior and his counselor began dropping names like Cornell, Northwestern, Boston College and (gulp) NYU, we tried not to gasp but determined to help him realize his full potential — even if it meant raiding our retirement savings.
I was fortunate to hear Deborah Fox, a long-time financial advisor and founder of Fox College Funding in San Diego, speak at an industry conference. Fox College Funding (FoxCollegeFunding.com) is a national network of financial advisers who specialize in late-stage college funding planning for higher-income families who do not qualify for financial aid.
As Deborah explained how she helped affluent families whittle down college costs, it was hard to contain my hope. While I can’t share the details of my own family’s late-stage college funding plan, Deborah was kind enough to provide a real-life client example. Here are my questions, and Deborah’s answers.
What is “late stage”college planning?
Late-stage college planning occurs when families lack much time to save — typically the high school years when many parents realize that college bills are just around the corner and that they haven’t saved anywhere near the amount they’ll need. Parents also assume, incorrectly, that it’s too late to do any meaningful planning. Instead, they begin praying for a large scholarship.
Your company specializes in providing planning services to families who won’t qualify for need-based financial aid. Is there a specific issue these families face when it comes to higher education?
Low- and middle-income families have the potential to fill the college-funding gap with financial aid. High-middle-income and affluent families who top the financial-aid thresholds are left to fend for themselves. Since college expenses are paid for with after-tax dollars, they must earn significantly more than the actual cost of an education. For instance, parents in a 33 percent combined federal and state income tax bracket with a college cost of $25,000 per year will have to earn over $149,000 in pre-tax dollars to cover the four-year expense. These parents may be earning healthy incomes; however, after paying taxes, they have far less available than one might expect. Without the availability of financial aid, many of these families will feel the cash-flow pinch.
AllianceBernstein recently released survey results showing that, despite their best intentions, parents are unprepared to cover the real costs of a college education. Parents have unrealistic expectations regarding the availability of financial aid, scholarships and grants. Most parents do not know how to shore up this important time in their financial life.
I’m assuming you show families there is a light at the end of the tunnel?
There are dozens of strategies these late-stage families can implement to potentially reduce their out-of-pocket college expenses — often by tens of thousands of dollars. In fact, the typical family we plan for will be able to reduce what education costs by an average of $20,000 to $40,000 over four years.
That is significant. Can you share some examples?