New College Planning Opportunities for Upper Income Clients

College financial aid Financing the cost of college is a significant issue for families and for recent graduates saddled with huge student loans. The total amount of outstanding student loans—around $870 billion, according to the Federal Reserve Bank of New York—is greater than the total level of outstanding credit card or auto loan debt. It is also growing, while the size of other consumer debt is shrinking or remaining the same. However, practitioners may not be aware that, in a surprising new wrinkle, more upper-middle-class families are now turning to student loans to help finance college costs. In fact, the greatest expansion in the percentage of student loan debt was among families with annual incomes between $94,535 and $205,335, according to a Wall Street Journal analysis of recent Federal data. A total of 25.6% of them had student loan debt in 2010, up from 19.5% in 2007. The average amount they borrowed jumped to $32,869 from $26,639 in 2007, after adjusting for inflation.

The average cost of a four-year college education has more than doubled since 1985, the Journal reports, which may help explain why even higher income families are turning to loans to cover costs. All of these figures clearly indicate planning opportunities exist for CPAs among these upper income families. Clients who may not have assumed that loans would be part of the college financing package may now have questions about them and how they should fit into the planning mix. Parents and students may also be interested in having discussions about value, and whether costly, well-known colleges are the best investment of their tuition dollars. The Journal reported that the number of freshmen from families with incomes of $150,000 or more who said that cost was very important in the college selection process has jumped by 20.7% since 2007, the biggest increase for any income group.

Practitioners should also be aware of the merit of including clients’ children in the college financial planning process. Students are paying an average of 30% of their college bills, according to Sallie Mae data, up from 24% four years ago. Even among families earning $100,000 or more, students turned to loans to pay 23% of their costs, compared with 14% in 2009. The percentage that parents in that group covered dropped to 52% from 61% during that period. At the same time, a resounding 91% of college students say that financial security is essential or very important to them, according to a Rutgers University report. As a result, they may be more reluctant to take on heavy student debt and weigh down their financial futures.

The upshot is that upper income clients are facing new uncertainties about college financing and about the optimum long-term choices for their children’s education. Practitioners can take the initiative to provide information and advice that can offer them new perspectives on education value and financing.

The AICPA Personal Financial Planning Section wants to help CPAs educate their clients on such critical issues as education planning. Through Jan. 31, 2013, the section’s Forefield Advisor client communication and education tool is available free to all AICPA members. Other topics are covered as well, enabling CPAs to reinforce the value they provide to clients’ full range of financial planning needs.

Andrea Millar, CPA/PFS, Sr. Technical Manager - PFP, American Institute of CPAs. Andrea leads the AICPA Personal Financial Planning Division. Her responsibilities include working with the PFP Executive and PFS Credential committees to drive the advocacy, education and other initiatives on behalf of the 7,500 AICPA members who specialize in providing estate, retirement, tax, investment and insurance advice to their individual clients.

This blog post incorporates information provided by Weiner, Edrich, Brown, Inc.

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