5 Strategies to Help Pay for a Child’s Academic Future

Higher education costs are just that – higher. The steady increase in educational expenses means your clients have much steeper bills for their children’s college tuitions than they had for their own. To illustrate how stark this contrast is, the average cost of tuition has increased 213 percent in the last 30 years.[1] To make matters worse, there is no end in sight for this trend.

It’s understandable that the price of higher education is one of the biggest worries looming in your clients’ minds. A defined goal, such as a large purchase or a child’s educational needs, provides much more motivation to clients than an amorphous, abstract goal.

As their financial advisor, you are uniquely positioned to help your clients utilize educational savings tools they may not otherwise be familiar with. Not only will this effort help your clients — it’ll also lead to greater trust in your ability to help your clients strategically position themselves for better financial outcomes overall.

Here are five ways you can aid your clients in mitigating the financial toll taken by rising higher education expenses:

1. Counsel clients about avoiding gift tax issues with direct tuition payments
By paying tuition directly to the educational institution itself, your clients can avoid losing a portion of their assets to the gift tax. This may seem like an obvious strategy, but it’s one that may not be top-of-mind for clients who are more accustomed to using complex financial products and might assume that the benefits of a trust would outweigh direct payment to the institution.

2. Discuss the new Section 529 rules of the 2017 Tax Cuts and Jobs Act
The 2017 Tax Cuts and Jobs Act updated the Section 529 Qualified Tuition Programs rules. The changes expand the breadth of qualified expenses. A 529-eligible investment account could already be used for college tuition, textbooks, required supplies, and some room and board. Now, kindergarten through grade twelve expenses can be qualified expenses. There are still some areas of uncertainty and some new restrictions, including a new $10,000 per pupil limit on non-college expenses. For the right clients, these plans may offer some tax savings and can be a great tool to include in the overall education financing plan.

3. Explore revocable educational trusts
Revocable educational trusts offer clients a way to stay in complete control of the money they are putting toward their children’s educations while still keeping it “set aside” for this purpose, as opposed to when they opt for UGMA and UTMA (Uniform Gift to Minors Act and Uniform Transfer to Minors Act) methods. In UGMA and UTMA accounts, the included assets are the minor’s property. With revocable educational trusts, however, your clients will remain in charge of the assets intended for their children’s educational expenses. If the client needs the money for another purpose, the trust can simply be revoked and the assets used for some other purpose.

4. Establish a HEET (Health and Education Exclusion Trust)
Health and Education Exclusion Trusts are a great strategy for wealthy clients, especially grandparents. Assets given to grandchildren by their grandparents are generally subject to heavy taxes under the GSTT (Generation-Skipping Transfer Tax). The way a HEET bypasses this taxation is by leveraging a rule in the tax laws that exempts payments directly to medical providers and educational institutions and by including a charitable beneficiary. This technique allows your wealthy clients with grandchildren to accomplish both their philanthropic goals and their contributions to their grandchildren’s education in one planning maneuver.

5. Encourage prospective students to find scholarships early
Lastly, encourage your clients to talk to their children about applying for scholarships early and often. Even if the prospective student is only a sophomore or junior, they should still begin looking into scholarship opportunities and planning accordingly. Although information about scholarships is widespread, applying for as many scholarships as possible is often an overlooked financing strategy.

The question of how to best pay for their children’s college tuition is a stressful one for most clients. As their financial advisor, you have a great opportunity to substantially impact their approach in a way that will both help them achieve their goals and reflect positively on your skills in the process. If you have any questions about the finer points of the strategies discussed here or any other estate planning issue, please be in touch. We’re here to help you and your clients.

[1] https://www.cnbc.com/2017/11/29/how-much-college-tuition-has-increased-from-1988-to-2018.html