3 takeaways for professionals from "How America Pays for College"

http://www.savingforcollege.com/articles/3-takeaways-for-professionals-from-how-america-pays-for-college-1080

For the past 10 years SallieMae and Ipsos have conducted an annual survey of a cross-section of Americans in or with students in undergraduate school regarding how they are financing their higher education. Both industry professionals and advisors to college savers can benefit from the insights the study offers when promoting their services, educating clients, and growing their businesses. All references and illustrations are from the 2017 study, "How America Pays for College 2017" unless otherwise noted.

Usage of 529 plans has leveled off

529 plans continue to grow, but despite being around for over 20 years, usage of the plans to pay for college seems to be leveling-off. According to the survey, usage of 529 plans to pay for higher education declined from 16% in the 2015-16 academic year to 13% in 2016-17, the lowest percentage in the past five years. Keep in mind that although this is more than twice the percentage of families who used 529 plans when they were first introduced introduced, there is still a lot of room for improvement.

What this means for the industry: The best way to increase utility of 529 plans is through state incentives – matching grants and tax benefits – and education. A subcommittee of the "College Savings Plans Network" is in the middle of selecting an advertising firm to implement a national awareness campaign of the "Got Milk" variety. Assuming a campaign is created and implemented by 2018, it would be reasonable to expect broader awareness and increased utility in the following years.

What this means for advisors: The vast majority of families are not using 529 plans. This isn't new, as we've known awareness has been low for a long time, but it's disturbing that the numbers have leveled off. Federal and private lending are not long-term solutions to higher education, making the future landscape for college financing highly uncertain, and savings more important than ever. There are tremendous networking and business-building opportunities in college planning. Be sure to discuss the importance of funding higher education in marketing your business, especially among potential Millennials and Gen-X clients.

RELATED: Top 6 advisor misconceptions about 529 plans

Parents and students are more cost-sensitive

Families are increasingly eliminating colleges due to the cost of the school than in the past. Anecdotally, there are many tools available to compare the cost of various schools, annual rankings for the best value among higher education institutions, and those whose graduates have the highest earnings after completing their degree. 10 years ago SallieMae found that 58% of families eliminated schools due to their cost. This year, they found that 68% of families eliminated schools due to their cost.

What this means for the industry: The average account size of a 529 plan was $21,383 in 2016, according to the College Savings Plans Network, which is not sufficient to meet the full cost of a higher education. So even among those that are saving, there is a need for education and assistance to meet the shortfall. As the beneficiary approaches enrollment, consider providing educational materials to get them thinking about bridging the gap, if the plan is not already doing so.

What this means for advisors: Even if you're already discussing 529 plans, college financing, and working on a savings plan, odds are that most clients will need some sort of assistance both selecting a school and meeting the shortfall in funding. Even HNW (high net-worth) investors are probably going to have cost in mind given that college is the second largest expense most people incur in their lifetime after purchasing their home- and college is fast approaching the point where it may even eclipse this.

So there are important discussions to have with your clients as the beneficiary enters high school to make their savings go further. Encourage them to enroll in college-credit classes in high school, and discuss the possibility of attending a two-year school before transferring into a four-year school to finish out their degree. This is an increasingly popular strategy as consumers become savvier to the fact that while employers do look at where a student went to school, the name on the degree is the same regardless of whether they spent two or four years at the school, or how much they paid in tuition.

RELATED: 6 ways to help your clients maximize financial aid

Savers don't know what they don't know

Contributions from students to pay for college have been increasing as contributions from parents have decreased. However, most families don't understand how financial aid, scholarship programs, grants, and work study programs work. Some think that just because they have multiple children in college at once they will somehow have access to more financial assistance, when that benefit can actually be pretty minor or negligible. Or that most financial assistance comes in the form of preferred loans.

"I definitely didn't realize that there were so many other things that you had to cover, even if you had a quote unquote full scholarship."

Taylor M., College Senior from SallieMae's Survey, How America Pays for College

More than anything, there is a misconception that saving for college directly penalizes the saver from a financial aid standpoint. "So why save at all?" said one recent Savingforcollege.com Facebook Live event attendee. "How does a 529 impact financial aid?" is also our most asked question. There has also been an uptick in questions like, "What if all college is free by the time my child enrolls?" or "I live in New York, can I just close out my plan?"

The 529 industry does a pretty good job of addressing the impact of financial aid to savers in its promotional and marketing materials, but still needs to get ahead of the sense of complacency some families have with tuition funding programs grabbing headlines in the press. Tuition accounts for about a third of costs, meaning that there is still a huge shortfall in funding. But families that receive a "full ride" or have tuition covered by their state don't always understand this. Many families that qualify for these programs will have children that are first-generation college attendees. Drop-out rates for those that underestimate the costs are unfortunately high, so more information is needed by families about the benefits and limitations of free tuition programs.

Financial professionals should also be discussing with clients the many "free tuition" programs that are causing confusion among college savers. Know that most of the free tuition plans have a cap of $100k or $125k in income and, since most advisors are working with HNW clients, will not qualify.

Further, HNW clients should both apply for and understand better the financial aid for which they will qualify Most financial aid they would receive will be in the form of preferred loans. Also note that most HNW clients should still complete the FAFSA (Free Application for Federal Student Aid). According to the National Center for Education Statistics, nearly half of applicants in the top 20 percent of earners have qualified for some form of aid, such as preferred federal loans.

RELATED: Free college is here- but don't stop saving