Morningstar Advisor - Summer 2008 - 32

Spotlight Work Your Way Through College Planning By Jeffrey M. Laderman The number of hurdles grows to reach what should be a simple goal: financing a college education. The cost of attending college has been galloping ahead at more than double the inflation rate for some three decades. Over the last 10 of those years, students and their families actually caught a break. As the inflation rate came down to about 2.7% a year during that period, the growth in college costs slowed to just 5.6% a year, according to the College Board’s “Trends in College Pricing” study. Now here’s a frightening thought: With skyrocketing prices worldwide for oil and food, the pace of inflation is quickening. If we go back to the high single-digit rates of the 1970s and early 1980s--and double them--just think of what four years of higher education will cost when today’s preschoolers are ready to enroll. Then There’s the Credit Crunch lege savings plans. “As you go through tough economic times, college savings becomes discretionary. It’s not an immediate need, like putting gas in your car or food on the table or worrying if you’re going to have a job.” Well, the news is not all bad. Some elite universities are acknowledging that financing a college education can be a struggle even for the upper middle class. Late last year, Harvard University announced it would boost financial aid in a way that reaches students with annual family incomes up to $180,000. It’s a grand gesture from Harvard (with $35 billion, the nation’s largest endowment) and Yale University (with $23 billion, the second-largest endowment), which quickly followed on its rival’s dramatic move. Still, even if a student is acing the 5th grade, it is no guarantee that he or she will gain acceptance into one of these schools. If anything, this policy will encourage many to apply to these who otherwise wouldn’t, further driving down the acceptance rates. And the reality is that only a handful of universities have the wherewithal to make such offers. And More Challenges them to qualify for financial assistance. For that reason, some advisors encourage clients to stash money for college using life insurance policies and annuities because “they’re invisible on the financial aid applications,” says Linda P. Taylor of the College Funding Network, Inc., based in Camarillo, Calif. “The application doesn’t ask about them.” Clearly, college planning is a business opportunity for advisors who master the intricacies because so many families need such guidance. Jim Stone, a professor at the College of Financial Planning in Denver, says about 3.3 to 3.4 million students are expected to enroll in college every year for the next five or six years versus 2.5 million per year in the early 1990s. “Certified Financial Planners know how to forecast cash flows, and they know investments,” says Stone. “But I don’t know if they really have the knowledge necessary for college planning.” Michael Cates, senior director of certification programs at the College of Financial Planning, says education funding doesn’t get a course in itself but comes up in many areas in the curriculum, such as taxes and estates. College planning is also a challenge because of the ever-changing rules, regulations, and tax laws. To wit: Custodial accounts, long used by families to salt away money for college, are no longer as effective as a college-savings tool. Higher-than-expected inflation is the latest addition to the syllabus of that real-life course, “College Planning 2008.” You should also add the credit crunch, which has prompted some major lenders such as the Bank of America to stop making private education loans. If a family’s plan included lots of borrowing, that plan may now need to be revisited. “The crisis in the credit market has brought front and center the challenges of financing a college education,” says Andrea Feirstein, managing partner of AKF Consulting, which advises states and administrators on 529 col- College planning gets more challenging each year, in part because the stakes are higher— investors need to amass more and more funds. The object for most families is to optimize investment returns in a way that still allows 32 Morningstar Advisor Summer 2008

Morningstar Advisor - Summer 2008

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