By Jason Anderson, CFP
College costs continue to skyrocket, remaining out of step with any normally functioning economic indicator, including inflation. This planning challenge represents a significant opportunity for advisors to add value to the lives of their clients across multiple generations. Many advisors know how to run college cost calculations in their financial planning software, but few know how to expand this conversation beyond the numbers to deepen their firm’s important relationships.
Fortunately, advisors can follow a simple, but impactful, four-step process to engage their clients with the college savings conversation:
Step 1: Define a college funding strategy
More than any of the other steps, the financial advisor or planner can offer great value at this stage of the process. It is also the most ignored. Most advisors use general assumptions to project college costs for their families. For example, calculating the future value of the average state or private college multiplied by number of children. This basic analysis falls short because it does not include the key educational assumptions of the family. To use just one example, a family who plans for their children to go to community college before transferring to a four-year institution will not be well-served by this planning process.
What is your clients’ vision for their children’s educational experience post-high school? If the family has not defined this vision for college, a meeting is in order. Sit down with your clients and any other interested parties to discuss key questions such as:
· Does the family plan to limit the type of college the student can attend?
· Is there a desired educational pathway or major choice (2-year college, 4-year university, graduate or professional school)?
· Is there a preference between public or private institutions? Are there prestige or legacy factors at play?
· Will others be involved in funding secondary education? For instance, grandparents or wealthy extended family members?
· Is the family debt-adverse or hoping to avoid student loans?
· Will the student commit to graduating in four years?
This is just a start. Other items to discuss include funding limits, student responsibilities, other preferences, and outside influences.
Importantly, this conversation can engage multiple generations (up to the grandparents or down to the children) leading to an opportunity to introduce your firm to new clients. What better way to start a relationship with grandparents than to build an educational legacy with grandchildren, or with parents by discussing one of their major financial concerns?
Step 2: Project college costs
In this step, the advisor uses the assumptions in Step 1 to project college costs for the family, generally using software or one of the many online calculators. One thing to be aware of in this step is the shock factor of the final number - it will likely be much more than the average family can afford.
Understandably, such a goal can seem insurmountable for clients. This is where you can again add value to the family. Try to define what portion of the expenses the family will fund using savings, student loans or scholarships, and current earnings while the child is in school. This will uncover a more realistic goal for college savings that fits in the overall funding picture.
Step 3: Regress this cost number back to a monthly savings amount
Again, this step helps the family break a larger goal into smaller, achievable steps. Of course, a family cannot save where no funds exist to divert. Financial planners see the opportunity here to coach the family on how to budget and prioritize their financial goals. If college savings is high on the list, clients will be ecstatic when you help them save their first monthly amount. Likely, it is something that’s been taking up mental bandwidth for them for quite some time.
Step 4: Develop a plan to invest monthly savings
This is where you open the door to your real area of expertise: helping your client achieve all their financial goals. The reality is the investment mix for college savings will depend on the overall financial plan for a family. In other words, this general conversation about college savings can seamlessly lead to a broader conversation about beginning a longer-term relationship with your firm, through AUM, financial planning, or specific products to help your clients achieve their over-arching goals. It also sets you up as the expert in education planning, whether you gain that experience in-house or outsource to a provider with knowledge in the areas of financial aid and admissions. Either way, you have now set yourself up as the trusted advisor in this crucial space.
About the author: Jason Anderson, CFP®, CPA
Jason Anderson is the owner of Gradmetrics, a college and student loan planning company. He is also a Lecturer at the University of Kansas and incoming Ph.D. student in the personal financial planning doctoral program at Kansas State University.