The most common goal discussed with my clients and prospective clients is retirement, or financial independence. This was the case a decade ago and remains the case now. The second most common goal a decade ago was college savings. However in recent years, college savings seems to have lost it's footing to the likes of home purchases, starting a business and various other financial tasks.
As I sometimes hear, collegiate expenses are growing so rapidly it seems likely to hinder one’s ability to accomplish other important goals. There is also a concern that a college education will not have as much value in the future as it had a generation ago. Or perhaps this generation of parents wants to instill more personal responsibility on their children and have them take ownership of their education. Whatever the reasons, more important than where the goal ranks is whether it is still obtainable in current times. In this month’s ‘for your consideration’, I want to break down exactly how college savings fits in a financial plan. In addition, I want to examine whether the financial planning community incorrectly characterizes this goal as a single life event rather than a long-term strategy. First, despite my intro, I want to assure you that college savings is still a common goal among parents and grandparents, and is often ranked highly among clients when I create a financial plan. However, college savings is also one of the more pessimistic conversations clients have with me. Despite wanting to be able to provide college funding to their children, the goal feels unreachable to many. To remove the pessimistic outlook of obtaining this goal and the stigma that can be associated with not being able to provide college funding, I want to redefine college savings and create a better way to interpret how the goal can be achieved. College funding at it's core is a subset of estate planning, or more specifically generational wealth transfer. How do we get money to the next generation(s) in the most tax efficient manner possible. It just so happens that college planning presents the most tax efficient way to pass off your wealth. First by using accounts that allow for tax free growth and tax-free distributions for qualified expenses (e.g. 529 plans, Coverdell accounts). And second, because there is no limit on the amount of funds you can pay directly to an education provider while avoiding gift tax consequences. But education planning does not need to be the only, or even the primary method for helping loved ones financially. When I am presented with a college funding goal, my first chore is to find out exactly why this is important to the client. Is the goal to provide education opportunities, or does the person providing the financial support want to give the benefactor a financial head start in life, regardless of the method? If the answer is the former, then that’s swell! Let’s do what we can to put money away and be realistic about what we can or cannot afford. If the answer is the latter, then let’s understand exactly what we are trying to accomplish and recognize the potential pitfalls of saving solely for college. While the benefits of education savings accounts are many, those benefits do not extend beyond the goal of education funding. If funds are needed for something other than educational funding, the funds in education savings accounts may not be available. If the benefactor receives funds from scholarships or grants, or decides to pursue life goals that do not include higher education, your savings effort may prove to be fruitless. In many cases, college planning begins when the benefactor is very young. It’s hard to speculate what value a college education will have, what interest a benefactor will have in college, or what funds will be needed when almost two decades will pass before the goal is realized. If the goal is to ‘help out financially’, it can be achieved through a variety of different actions. You can provide funds for a first-time home purchase or provide seed money for a business idea. You can also help by paying for the education expenses of future generations, thereby providing indirect financial relief to your benefactors. If there is enough faith that the person will be financially responsible, you can even just gift money for whatever. The point is that it is important to understand that helping those you care about financially does not have to have a finish line or a single moment of completion. Especially when the price tag of that single event seems unobtainable. Rather, a goal can be ever changing, or continuous or have no defined parameters whatsoever. If you understand what you are trying to achieve and why it is important to you, planning for a single event may prove to be counterproductive. Much like diversifying your investments, it is also important to diversify your planning strategies. Financial planning requires an understanding of the probabilities associated with various future events, and then devising methods to prepare for each possible result. When it is possible that what a person wants to accomplish does not have a neatly defined point of completion, you need to make sure you are not boxed into a single strategy. Moreover, when a societal defined right of passage has an increasingly high price tag, it is important to understand that it is still possible to provide financial support when you think beyond labels. There doesn’t have to be a universally defined title for your individual goals.