The tax-advantaged 529 savings plan is a typical go-to investment vehicle for people planning for their kids’ college education, but some advisors believe that it won’t be enough, so they steer their clients elsewhere.
Parents sending their kids to college in the fall are realizing that the 529 plans — which “are often age-based investments” — have missed the mark in terms of what they hoped to have accumulated over the years, according to Karen Reifel, a wealth advisor at Beacon Pointe.
They “are finding it a little challenging to pull the trigger on using those funds this year to pay for this fall semester tuition,” Reifel said.
“The investments have become more conservative in anticipation of the kids going to college this fall,” she added. “But even the conservative investments like bonds are down by about 10% this year.”
As an alternative to 529 plans, Reifel suggests using “true capital preservation-type investments” a year or two before college payments begin.
“We just want to make sure and keep what we've got, right?” Reifel said. “That's the most important thing.”
The average 529 plan balance has shrunk by thousands of dollars — from $25,395 at the end of December to $21,016 in June, according to data compiled for CNBC by ISS Market Intelligence.
Simply put, planning and paying for college isn’t what it used to be, according to John McCafferty, director of financial planning for Edelman Financial Engines.
“And we just don’t want people to stay in the dark, because what worked 10 or 20 years ago might not work going forward,” McCafferty said. “And the landscape has changed, and maybe your perspective or approach on how you plan to address this need, maybe that needs to change as well.”
“We’re not anti-529, but we are pro liquidity,” McCafferty noted, adding that a non-retirement account or lifelong learning account can offer more flexibility for clients. Lifelong learning accounts are employee-owned educational savings accounts that help pay for education and training expenses.
Meanwhile, parents shouldn’t just be investing for their kids’ college education — they should also be taking on a mentorship role when it comes to their kids’ financial future, according to Matt Meline, founder and chief executive officer of PrairieFire Wealth Planning.
“And so, it's helping them, the student, build a financial foundation, but it's not doing all the work for them,” said Meline, who wrote a book, published last month, titled “Empty Nest, Full Pockets.”
Citing an example, Meline said he has helped clients do the number crunching and determine if they want their kids to pay for their education themselves or with assistance. Once that’s decided, a plan is created, and that often includes a 529 plan, he says.
Meline also recommends to clients that their kids have their own savings accounts. “We're careful with that though because the way financial aid works, we always advise our parents, if the child has too much money in their name, it can impact their ability to obtain financial aid, so we try to strike a balance there,” he said.
Late-stage planning for paying for the kids’ college education leads to problems such as “overpaying for college, derailing retirement, and getting in over their heads with student loans,” according to Joe Messinger, co-founder of college consulting firm College Aid Pro.
The Financial Planning Association, in partnership with College Aid Pro, launched in May a program aimed at training participants on financial aid and college planning. The new offering, dubbed “College Planning Made Easy: An FPA Certificate Program,” is designed to help financial planners guide clients on financing college, including with financial aid.
The FPA estimates that the U.S. has 44 million student loan borrowers, and their collective education debt has surpassed $1.7 trillion.
Meanwhile, ISS Market Intelligence estimates that $398.6 billion in assets were in 529 plans as of the end of 2020.
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