Eternal Students

In case you haven’t noticed, back-to-school season is already upon us. Students entering their senior year of high school will be making last-minute visits to prospective colleges while others will be filing their applications and tinkering with their essays. Those who have already matriculated are not only thinking about graduating, but many are eyeing advanced degrees. Higher education, it seems, is getting even higher. In fact, the number of masters degrees granted is expected to increase by 35% between 2004 and 2016, according to the National Center for Education Statistics. This means your clients will more than likely need education-funding plans that cover more than the traditional four years at college for their children or grandchildren. “Planning for more than four years is a definite now,” says Dan Crimmins, president and founder of DPC Wealth Management in Ramsey, New Jersey. “Some go on to grad school and others are just taking longer” to get their bachelor’s degree, he adds.

The Millennial Matter

It turns out that many students are not only taking five or six years to graduate from college, but a much larger percentage of the so-called Millennial Generation (those born roughly between 1980 and 1994) are moving back into their parents’ households after getting their degrees while extending their college days at graduate school. MonsterTRAK, an online resource that connects college students and recent graduates with employers looking for entry-level and internship candidates, conducted its annual nationwide survey of college students, recent graduates, and entry-level employers in early February. It found that just under half of prospective graduates plan to boomerang–or move home–upon graduation. Furthermore, the study found that though only 22% of 2007 graduates expected to move back to the nest for more than six months, 43% of those already out of school extended their stays and have yet to leave–primarily, the respondents said, due to limited financial resources. Moreover, those that do not go to graduate school are having a hard time finding work after college.

The MonsterTRAK research found that 59% of employers surveyed expect to hire 2008 graduates in the spring or summer, a decrease of 17% year-over-year, while 29% are still unsure of their new-graduate hiring plans–nearly twice as many that reported indecision in 2007. With 42% of 2007 graduates reporting student loan debt that exceeds $25,000, and another 33% with credit card balances of more than $5,000, it’s no surprise that a growing number of young professionals are spending more time back at home.

This provides a challenge to planners helping their clients pay for their children’s higher education, since that education will take longer and cost more. It also comes at a time when many student loan lenders are tightening their lending policies, and even refusing to lend money to students at some specific schools. “The housing market is still in bad shape and affecting the student loan business,” Crimmins notes. “It’s Congress’s fault–they have squeezed the lenders to the point where they’ve basically made profitability questionable.”

Up, Up, Up

“Even for clients with money, you’re currently talking about higher-end, private schools costing in excess of $100,000 for four years,” Crimmins points out. It’s not just Ivy League schools whose costs approach, and even exceed, $50,000 a year: for the 2008-2009 academic year, George Washington University in the District of Columbia estimates that tuition plus room and board would cost a student (or the student’s parents) $50,312. That doesn’t count books and supplies and the personal living expenses of students, which would conservatively add several more thousand dollars to the bill.

According to The College Board, at public four-year institutions, in-state tuition and fees average $6,185, or $381 more than last year, a 6.6% increase. In 2007-08, average total charges (including room and board, tuition, and fees), are $13,589, a 5.9% increase over last year. Tuition and fees for out-of-state students at public four-year colleges and universities average $16,640, which is $862 more than in 2006-07–a 5.5% increase. Average total charges (including room and board, tuition, and fees) are $24,044, a 5.4% increase from 2006-07. At private four-year nonprofit institutions, tuition and fees average a whopping $23,712, or $1,404 more than last year–a 6.3% increase–with average total charges (including room and board, tuition, and fees) at $32,307 in 2007-08, which is 5.9% higher than in 2006-07. Crimmins attributes growing tuition costs to a higher education arms race. Colleges are competing for the biggest pools, swankiest cafes, and best technology. “The competition is incredible,” he says. “Yet people aren’t turned away by the price.”

Grandparents to the Rescue

Advisors all seem to agree that 529 plans are the best course of action when it comes to education funding. “The 529 is clearly getting more of a look,” Crimmins mentions. This is particularly true when it comes to grandparents. “First of all, they usually are the people that have the money,” says Bruce Merrell, vice president of financial planning for United Advisors in the wealth management firm’s Toledo, Ohio, office. “It gives them a lot of opportunities.” Crimmins agrees, “The one advantage, from an estate-planning perspective, is the fact that you can fund up to five years into a 529 plan at once–totaling contributions of $60,000 from each giver–$12,000 from each parent or grandparent times five.”

Another 529 plan advantage is that even though the money is out of your client’s estate, they’re still the owner and can take that money out any time they want, should they need it, though they will pay a penalty and taxes. Merrell cautions against leaving the plan in a grandparent’s name for too long. “The only problem is that if the grandparent ends up in a nursing home and applies for Medicaid, they will be required to use the 529 in their name before the Medicaid.” It’s something to think about if a client’s health is starting to fade. “You may want to take it out and pay for the nursing home and take care of yourself, or you could–if you plan enough in advance–transfer ownership of the 529 to the parent of the child,” Merrell advises. There is a five-year lookback, however, so the name change has to be done enough in advance. “The nice thing is that a grandparent can not only serve the goal of saving for college for children, grandchildren, or great-grandchildren, but also their own goals, such as making sure they have access to the money during their lifetime or to avoid estate tax when they die.”