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Playing with Fire: Financial Advisors Need Help with College Planning

Playing with Fire Are you playing with fire when it comes to college planning? You just might be.  I have a good friend of mine whose signature mock saying is “drive fast, take chances, live dangerously.” Well, most people do and would just laugh at that.  “No way,” they think.  That’s not me.  Yet, more than one in 7 families are playing with fire when it comes to college planning. And their financial advisors need help helping them avoid these mistakes.

In fact, these folks are filing a FAFSA financial aid form with mistakes that reduce or eliminate much-needed aid.  Part of the problem is that folks attempt to navigate the complex financial aid process on their own. Or if they use a financial advisor most of these professionals are clueless about all the options.  Financial advisors, like most parents of college-bound students here in the Boston, Massachusetts area or around New England and the US generally, need help with college planning.

This is why if you want to maximize your college financial aid package and have a clear cash flow plan in place to pay for college in a smart way you’ll need to work with a college financial planning specialist.  In fact, college planning specialists like those here at College Cash Pro receive a fair amount of business from non-specialist advisors who may know just enough to be dangerous when it comes to college planning.  But at least these folks know enough to call in support when they need it for a Win-Win-Win for the client, the student and the advisors.

It starts with understanding the process and the financial aid formulas.  It’s hard to plan unless you know what income and assets will be counted in the financial aid formulas.  Figuring out this Expected Family Contribution (EFC) is only the first step.

I had a client come to me after talking with their CPA who prepared his personal tax returns.  This client owned lots of rental real estate.  A lot of it was worth more than he owed in mortgages.  The CPAs advice to this client: Just pay the bill.

On paper this client was worth a lot of money.  But that wasn’t reflected in his bank accounts.  With a pencil and piece of paper, the CPA jotted down this client’s estimated EFC:  5.6% of assets plus 25% of adjusted gross income (AGI).  OK, that’s what you can afford to pay.  Next.

Whoa, Nellie! There’s more to college planning than that.  What about ways to lower his adjusted gross income?  Heck, he is a professional real estate investor running a business.  There’s all sorts of ways to legitimately use the tax code to his advantage.  What about funding his retirement maybe through an IRA?  That’s certainly an option to use to help him lower his AGI and improve his retirement prospects.  What about the income and asset protection allowances provided for in the formulas?  Not a word on that from the CPA. How about loans?  Should he refinance his home or get a home equity line of credit? What kind of student loans are there and in what order should the client apply? And how will he pay for all of them anyway?

And the bigger picture issue: How will this impact his retirement?

But I guess I shouldn’t be too harsh on the CPA.  Heck, financial planning is not his job.  His is to look in the rear view mirror and record what happened to his client last year.  The job of a financial planner is to drive not by looking in the mirror but by looking  forward.

It’s not much better when dealing with most financial advisors.  I know. I was one of them.  Until I actually got into the nuts and bolts of college funding strategies and financial aid, all I knew was that you could save for college using a 529 plan.  The sooner, the better.  Too often, when a client asked for specifics in dealing with the immediate issue of actually paying for college, I was as lost as the next advisor.

But that’s not the case anymore.  With specialized software tools, a college financial planner (like those here at College Cash Pro and yours truly) has the ability to not only calculate the estimated Expected Family Contribution but show how different asset or income strategies can be used to lower the EFC.  Maybe it’s a matter of retitling asset accounts.  Maybe it’s about spending cash to pay off consumer debt. Maybe it’s about hiring your kid in your business.  Maybe your kid would be better off not working at all. A lot of these strategies have nothing to do with 529 plans, investments or insurance.  And for some of these strategies, it’s not too late to do things when your student is a Junior or a Senior in high school.

Knowing the EFC is only part of the battle. Now you have to find a school that is the right fit for the student, figure out how much and what kind of aid packages they offer and negotiate to get the best deal.

If your goal is to get your student into a school that is the best fit at the right price and with the maximum amount of aid available, then you or your financial advisor really need to bring in the help of a college planning specialist.  Doing anything less than that and you’re just playing with fire with your cash flow now and your retirement later.