Congratulations to all parents and grandparents who have children graduating from high school this year. For many, this annual rite of passage will be followed by another: heading off to college. But for other students, college isn’t part of their immediate or down-the-road plans.
No matter what the new grads in your clients’ families are planning after high school, the cost of higher education and career preparation (be it college, trade schools or apprenticeships) isn’t cheap and advisors can help clients sort out the numbers and initiate conversations about alternative paths.
Let’s get the financial realities out of the way first.
Costs of College
It’s not a secret that college price tags have grown at a rate higher than inflation over the last 40 years. While the pandemic and recent inflation has slowed down this rate of growth, this is still a rather costly investment.
The cost of attendance for the 2021-22 academic year was $54,800 at a private college and $27,330 at an in-state public institution.
If you think that’s steep, for a child born in 2022 these costs are likely to increase to $85,819 for a private education and $33,934 for an in-state public education. To fully fund this cost, one can expect to invest $790 per month for private or $310 per month for public.
Few parents have the cash flow to support this investment starting the month the child is born and to maintain it without interruptions for the next 216 months. In addition to the steep costs, many of today’s parents are struggling to pay off their own student debt and to buy houses that have also experienced big inflation.
Costs of Trade School, Apprenticeships and Other Alternatives
Alternatives to the traditional four-year degree can be found, at a fraction of the cost, in community colleges, trade schools and apprenticeships. One local example can be found at Cincinnati State, which lists in-state tuition of $4,050 for the 2021 – 2022 year. Similar low-cost options can be found across the country in a wide range of programs offering academic certificates and two-year associate degrees.
Trade schools provide access to skilled trades like welding at a total cost of typically $10,000 to $15,000 and some employers offer apprenticeships, often at no cost to the student. While these programs offer a variety of courses of study, the common theme is they tend to provide access to the job market with in-demand skills in a timeframe that is faster than a four-year degree and for a lower cost.
Be a Sounding Board
Many of your clients look to you for guidance and update you about the milestones in their lives, so it shouldn’t be difficult to get the conversation rolling. Chances are, your clients have already spoken with you over the years about the runaway costs of college and their expectations about how much they’d like to contribute.
If your clients are at all like the clients I have worked with over the years, they may prioritize college expenses over other goals such as their own retirement. Prior to becoming a parent, I had a hard time understanding this. But when our family began to look at saving for college, I experienced the same emotional response.
Higher Education Tools
Certainly, grandparents, scholarships and loans may reduce the cash needed from the parents, but it does not reduce the total cost of college or other post-secondary programs.
Advisors should not reflexively offer to open 529 plan accounts, which have become the dominate way to invest for college. State-sponsored 529 plans (introduced after Section 529 was added to the Internal Revenue Code in 1996) offer the benefit of tax-free withdrawals of the growth on the investment if the money is used for qualified expenses. However, a 529 plan is only one type of tool that can be used.
Assuming that college or other programs are an appropriate goal for a client’s child, advisors should also consider if saving in other vehicles such as a Uniform Transfer to Minors Account (UTMA) or Uniform Gift to Minors Account (UGMA) are better choices. Rental real estate may also be a consideration for clients seeking a more hands-on approach to their investments for higher education.
Each of these types of investments has attractive features as well as downsides. A 529 offers tax-free growth if used for qualified investments but limits investment choices and comes with penalties if not used as intended. A UTMA/UGMA has a wider range of investment choices but can lead to the kiddie tax and will require filing a tax return for the child. Real estate can offer current income, tax deductions and long-term growth but can also have higher expenses and require more of a time commitment to manage than either a 529 or UTMA/UGMA.
Funds in a 529 account can be used tax-free for post-secondary programs at eligible institutions as defined by the US Department of Education. Funds in a UTMA/UTMA account or invested in real estate can be used for any type of program and also to fund gap years. Unlike 529 plans, these types of investments are not tied specifically to education so they offer a wider application, but they don’t offer the tax benefits of a 529.
Alternatives to College
The cost to attend college also includes the opportunity cost of what else could be done with the funds used to pay for college — and that has more people thinking about alternatives.
The school district my son attends list the options after graduation as the “4 Es”: Enrollment, Enlistment, Employment and Entrepreneurship. When I attended high school in the same school district years ago, I don’t recall any discussion that options besides a traditional four-year degree were of equal value. My son wants to pursue IT and we are looking at some certifications for him to get him started on his journey.
Advisors should take the same approach as the school system: To express that enrollment in further studies at college is a valuable option but not the only option. Enrollment can also mean online learning to obtain a certification, which is the route my son wants to take, or a trade school. Knowing that the career he wants to enter doesn’t require a four-year degree, it doesn’t appear that taking the time to earn a degree is the best decision for him, at least at this point.
Skin in the Game
Regardless if your client’s children or grandchildren will be attending traditional college or taking another route toward financial independence, your clients should be talking to them about their expectations. For example:
- Will children be required to earn and contribute money for tuition, living expenses or a vehicle?
- Will they have to take on student loans?
- If they’re living at home and working, should they have a plan for contributing to household expenses?
- If a student will be working during the school year, should they put something aside for their expenses?
Sometimes it’s easier to have these conversations with a financial expert.
While supporting a client’s goal to fund a college savings plan, advisors should also be willing to challenge the notion that college is the only next step. Your clients are counting on you to be the voice of reason.
John M. Gehri, CFP, ChFC is a licensed investment advisor representative with Harvest Financial Advisors in the Cincinnati/West Chester, Ohio area. He may be reached at [email protected]. This article is for informational purposes only. Any commentary and third-party sources are believed to be reliable but Harvest Financial Advisors cannot guarantee their accuracy.