College planning: It’s closer than you think

Graduation is barely in the rear-view mirror and the fall semester is right around the corner. Now is the time to enjoy one last summer before the first year of college. Ideally, everyone would have begun planning for college years ago and could breathe a sigh of relief today, knowing the hard work is behind them. Still, this can be an emotionally charged time for many family members.

Once you meet a client and learn about the family makeup, one of the first questions to ask is, “Have you started planning for college?” Advisors often focus primarily on retirement planning,  but higher education funding is an important part of financial planning conversations for families with children and younger couples who may wish to pursue their own post-secondary education goals. Even if your client doesn’t currently have children, if they intend to, it’s never too early to start saving for college.

You don’t want to encourage clients to kick this down the road. Meet the challenge head on and encourage them to be reasonable from the standpoint of how much they can afford to contribute and how that amount compares to what the FAFSA (Free Application for Federal Student Aid) process may expect from them. Here’s how to get started.

Educate yourself first

Before jumping in to assist clients, you’ll need to become familiar with the FAFSA process and other aspects of financial planning for higher education. You’ll want to know the answers to questions such as, what’s counted as income and how is it counted? A cash gift to the student, including payments of tuition bills, is reported as untaxed income on the student’s FAFSA, but that doesn't acknowledge gifts given to the parents of the student.1 

How to pay the bill

Common sources of college funding include:

  • Student Loans — Offered by both the federal government and private financial institutions
  • Savings — Whether from retirement or non-retirement assets, these may be helpful in paying the bills
  • Scholarships / Grants — This requires additional time for application purposes but can help ease the burden of the overall educational expense
  • Work as You Go / Work Study — For the student, this may be the best way to contribute to their higher educational expenses
  • 529 Plans — Often established by parents and grandparents, these accounts could be triple tax leverages with state tax deduction upon contribution, tax deferred growth, and ultimately tax-free distributions if used for qualified higher education expenses

Considerations to remember when using FAFSA

Certain eligibility requirements must be met in order to qualify for aid via FAFSA. Those requirements include:2

  • Demonstrating the financial need for aid
  • Enrollment or accepted enrollment as a regular student in an eligible degree or certificate program
  • Enrollment at least in half-time to be eligible for Direct Loan Program funds
  • Maintaining satisfactory academic progress in college or career school
  • And more

There’s a section on the application for providing financial information, and it’s important to note a few things. Some financial assets may be treated differently or may not count at all. The FAFSA doesn’t require reporting the value of retirement accounts, such as traditional and Roth IRAs, 401(k) plans and pensions, though pre-tax contributions are considered income.1

This may seem obvious, but assets intended for college that are owned by a third party, like a grandparent, don’t need to be reported. Once the money is given, however, that’s a gift of money to the student and must then be reported as untaxed student income on the application.1 Student income is treated differently than parental income, so the giver will need to choose the gift recipient wisely.

Educate your client

Once you’ve amassed a reasonable understanding of the ins and outs of college funding, share your knowledge with your community. Look into conducting client workshops, use social media, or even produce a radio or podcast commercial to market your finely honed skill. Market yourself in the local newspaper and community boards.

Ask your clients and prospective clients insightful questions. “Do your children play sports?” “Is your child a straight A student?” “Absent a full scholarship, how will a child get a college education?” Be able to provide answers as a resource in your community.

What happens if college is no longer on the table?

The good news is that savings, retirement or other finances can always be redirected for another use. Even a 529 plan can be used for another qualified student including yourself, though it will cost you a 10% penalty if it’s withdrawn and not used for educational purposes.4 Also, don’t forget that these funds can also be used for K-12 expenses.4

Configure a family plan

Invite the entire family and ask each member what they plan to contribute to the educational process. This may sound presumptuous, but well-meaning grandparents could have a gift planned for the graduate without appreciating the impact it could have on the FAFSA for the following year. It’s important to lay everything on the table so all family members involved are aware of the potential consequences of their good intentions.

More resources for helping clients plan for higher education

Establishing a whole-family connection to help with college planning can strengthen individual relationships that can blossom into new client opportunities, too. Consider reaching out to the college student to offer financial advice. Schedule meetings during breaks from school. Is the student working during the summer? Are they contributing to a Roth IRA?

Also, don’t forget to congratulate them when they graduate, and be there for them as they land their first job and need advice on their first 401(k) or guidance on how to address educational debt.

This whole undertaking can be full of emotions — even downright stressful. Understanding the behaviors that go along with planning for college is essential, and we have the tools you need to help guide your clients and their families through the process. Click the link below to learn about our Behavioral Finance Advice program today. 


Marshall Heitzman
Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™

Marshall is TruStage's Advanced Planning Expert and has more than 25 years of experience in the insurance and financial services industry. He consults Financial Professionals on advanced retirement planning concepts for retirement and wealth management clients.

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