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How Poor College Planning Damages Your Clients’ Financial Goals

Having a baby is expensive. In fact, some insurance companies claim that the first month of a little one’s life can cost up to $27,000

And yet, as most parents will attest, that’s simply a down payment on raising a child into adulthood. As that child reaches maturity, the parents will be inching closer to making one of life’s biggest investments: college

According to recent studies, the average family pays just shy of $27,000 for one year of college. That includes out-of-pocket costs, student borrowing, parent borrowing, gifts from relatives, and “free money” scholarships. 

Note that these are the averages. Millions of Americans are paying far more for college, averaging $55,000 a year for private universities and $77,000 in the Ivy League

Such numbers help explain why over 44 million Americans are currently saddled with $1.7 trillion in loan debt. While politicians on Capitol Hill wax poetic about student loan forgiveness, families remain stuck with a financial albatross that inflicts serious pain on their short and long-term goals.

Financial advisors are the last line of defense to protect their clients from a college investment that could jeopardize their future. 

1. The Immediate Costs

We’re not painters, but as financial advisors, we do paint pictures for our clients — verbally. 

And just as Rembrandt used chiaroscuro to separate the light from the dark, we use numbers to separate the good outcomes from the bad. 

If that sounds vaguely threatening, perhaps it is. After all, our goal is clear: we’re trying to help our clients understand the gravity of their college investment. 

So when we sit down with parents of a college-bound kid — whether they’re expecting to matriculate in three years or thirteen — we start with a simple statistic: parent income, savings, and borrowing comprise over 50% of annual tuition. 

In other words, according to the Sallie Mae How America Pays for College 2021 report, 85% of parents pay colleges an average of $12,000 from their income and savings each year. They also borrow an average of $2,400 in annual Parent PLUS loans. 

We’re not even talking about scholarships here, nor are we mentioning how much the students themselves are borrowing. This is purely what the average parent is paying out-of-pocket to help make ends meet. 

And yet, there’s something even more discouraging to discuss. Many of these same families — 44% of them, in fact — did not use scholarships to help pay for school. Of those families, nearly 80% didn’t even apply for scholarships in the first place. 

What could drive families away from literally billions of dollars of “free money”? There are myriad reasons for this fiasco.

According to the Sallie Mae study, 25% of families don’t even know such scholarships exist, and 44% think their child wouldn’t be able to win them. 

However you look at it, one thing’s for certain: these college-bound families aren’t getting the guidance and encouragement they truly need. 

2. The Long-Term Consequences

America is billed as a land of opportunity — a place where you can have both this and that.  

So why has the cost of college forced families to trade their retirement dreams for their children’s diplomas?  

On a practical level, many Americans aren’t in a position to effectively save for retirement and fund college tuition at the same time. 

These are the facts: in 2021, 16% of parents tapped into their IRAs and 401(k)s to help pay for college (up 2% over the previous year, a worrisome trend).

That may seem like an insignificant number, but it belies a scarier truth.

If 16% of families are liquidating their retirement accounts to afford higher education, how many more families fail to invest any money into their retirement accounts at all?

In an economy with skyrocketing inflation — and with college tuition rates that have risen five time the rate of inflation since 1970 — who can blame them for staying focused on the here and now? 

This is more than a short-term problem. Such families miss crucial opportunities to invest during their peak earning years, and then, after their child graduates, they get saddled with loan debt and rapidly accruing interest. 

In a recent exposé, the New York Times highlighted exactly this kind of nightmare scenario, where a couple got overextended with Parent PLUS loans and ultimately owed monthly payments of $5,000

But what about 529 Savings Plans, you ask? 

Unfortunately, the academic year 2020-2021 showed that only 37% of families had 529s to begin with, and the average family used a mere $7,601 from them to pay for tuition. These 529 accounts are either being opened too late or neglected.

In this frightful reality, families are risking their retirement for a college education that may take decades to pay back. 

There simply has to be a better way forward. 

3. Eliminating the Estate

Why do we work so hard? It’s the age-old question that compels us to look both within and without. 

As advisors, many of our clients emphasize the importance of legacy — of leaving something significant behind for their loved ones. 

That’s why we tell our college-bound families to take college planning seriously. While nobody wants to deal with student loans, they certainly don’t want to do it past a certain age.

Statistics show that it takes an average of two decades for graduates to become debt-free. Worse yet, there are currently 6.3 million borrowers between the ages of 50 to 64 who are paying for their child’s education or their own. 

There are nearly a million people over the age of 65 — over the age of retirement — who are stuck in the same position. How can people leave behind a meaningful legacy when they’re spending their golden years paying down a forty-year debt? 

Education planning and estate planning are far from mutually exclusive. They’re inextricably intertwined.

Moving Forward 

We’re not painters, but we are problem solvers. 

At College Aid Pro™, our team of advisors built a fast, reliable, and seamless platform to help families shop smarter for college. 

And while our software is focused on college, it’s designed to help your clients enhance the whole of their financial lives, from today, tomorrow, and throughout retirement.

Click below to check out a free demo!

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