Just after Halloween, I attended a college planning session at a local high school that was put on by two experienced college planning professionals. While the first hour of their presentation was informative, toward the end of the session, misstatements and exaggerations were made and pressure tactics employed to motivate the attendees to act right then and there. As with any big financial decision, parents should get a second opinion on the financial advice they are given by so-called college “experts,” and they should be sure they are getting their advice from a fiduciary who has their back.
Few financial professionals have a fiduciary duty, which means that they must always act in the best interests of their clients. CPAs and CFP®s have this duty. Most financial advisors and planners and insurance salesmen without those certifications are held to a lesser standard. Based on a review of the presenter’s credentials, neither of these college funding “experts” had a fiduciary duty.
About an hour into the session, I was surprised when one of the presenters (who owns an insurance agency) made the claim that using 529 account funds to pay for college requires you to report the proceeds as income on your financial aid forms. This income would effectively lower the amount of any needs-based aid. The presenter’s statement was, at a minimum, highly misleading. The fact is that parents who pay their child’s qualified educational expenses from a 529 account that they funded do not trigger any income, as long as the withdrawals don’t exceed qualified educational expenses. Some 529 withdrawals do trigger income, such as when money from a grandparent’s 529 account is used to pay educational expenses. But this is not the norm, as Fidelity notes that only 15% of its 529 accounts are held by grandparents. For the presenter to make the general statement that using 529 proceeds to pay for college triggers income is disingenuous and absurd.
The second college planner then presented a frightful hypothetical example of parents incurring $40,000 of parent student loan debt in each year their children were in college. In his example, incurring $40,000 per year per child for multiple children—plus the compounding interest—left the parents with over $1 million of debt and huge monthly payments in retirement. While I agree that parents today are taking on excessive student loan debt on behalf of their children, this gentleman grossly exaggerated the problem, and failed to disclose that the average student loan debt of parents over age 50 is $37,000, not $1,000,000.
Then came the pitch. If you signed up for a meeting right then and there, they would waive the $250 “audit” fee. Rubbish. Don’t fall for these pressure tactics. Instead, look for a CPA or CFP®with college funding expertise. And if you can’t find a fiduciary with college funding experience, then at the very least get a second opinion to verify what the first college planner has told you. Otherwise, you may wind up with buyer’s remorse and that sinking feeling that the college funding “expert” just took you for a ride.
Cost of Attendance (COA) – Includes tuition and fees, room and board, books and supplies.
Merit Scholarship – Grants offered by some (but not all) schools based on student’s incoming grades and/or standardized test scores. Awarded to students in the top ~25% of incoming class.
Needs-Based Grants – Grants (not loans or work study) awarded based on financial need.
Private Scholarships – Scholarship awards that come from sources other than the college.
Total 529 Savings Plan – 529 savings in the parent’s or student’s names only.
Parent Pledged Assets – Any non-529 assets (e.g., savings, investments) that parents have set aside for the student for college.
Parent Pledged Monthly Cash Flow – Annualized amount of monthly cash flow that parents will divert to fund college.
American Opportunity Tax Credit – Maximum annual $2,500 tax credit per student often claimed on parent’s tax return. Income limits apply.
Student Pledged Assets – Student’s savings and/or investments that will go towards college
Student Pledged Monthly Cash Flow – Annualized amounts typically from work study or part-time jobs.
Grandparent and Other help – Amounts paid from 529s, savings, investments, etc of non-immediate family members including grandparents, uncles, aunts, and possibly ex-spouses.
Pre-Approval Amount – Total funds for college other than grants and loans
Funding Gap – Net cost of college less Pre-Approval amount. Typically equal to the total amount of loans that will be needed.
Loans – Federal Direct Student Loans are based on FAFSA filings and awarded through the school. Federal Direct Parent PLUS loans are taken out by the parents. Perkins Loans program has been discontinued as of 2018.
Remaining Funding Gap – Difference between Net Cost and all sources of funding (incl loans).
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