Here's a new web-based software program that may become the college planning solution for financial planners.
by Bob Veres
www.bobveres.com
There are certain areas of a client's life where the average financial planner's sophistication suddenly takes a big drop. Ask a fee-compensated planner to evaluate your cash value life insurance policy, for example, and chances are you'll get fairly generic advice.
The same is true about college funding. Most advisors can talk about different funding options like 529 plans and Coverdale accounts, but the level of technical help is usually not high in areas like how this or that strategy will affect the client's expected family contribution or how to negotiate with a college financial aid office. What's missing is a proper tool. For years, planners have had sophisticated tax and estate planning software solutions either as standalone programs or built into larger planning programs. They have stock option calculation packages. But where is the college funding software?
A newly-created online service may offer advisors a chance to become more sophisticated in a hurry. It's called Collegiate Funding Solutions-- a web-based system that includes an interactive questionnaire, pops up more questions if you give an answer that requires more data (Think TurboTax), and then spits out some planning ideas, strategies and suggestions. "The basic question that people have is: is there anything we can do to reduce the cost of college?" says Roger Lorelle, a cofounder of the site. "Our goal is to help people most efficiently prepare for college, and our natural allies are financial planners."
The system is the outgrowth of a college planning service that was being performed the way everybody else was doing it. "Back in the late 1990s," says Lorelle, "I realized that there was a real opportunity to help people figure out what to do in this college funding area," says Lorelle. "So I teamed up with a local planner in the Raleigh area, Bill Harmon, and we started purchasing information, buying things, pulling in public information, and of course there is a ton of public information out there, but it's so scattered around that you can't find what you need for any specific situation."
With all that information, and knowing where to look, Lorelle created customized plans more-or-less by hand. "The problem," he says, "is that by the time we finished somebody's plan, we almost had to charge them more than it was worth, because it was so labor-intensive. At about the same time, I realized that planners don't do this for their clients. People avoid this area because they don't have a solution at hand. We decided that if we could do this exceptionally well, we'd really have something."
At that moment, the business model shifted to creating a tool for the financial advisory community, which could be accessed on the web, either by the client or by the advisor, with the final information always being delivered to the planner. "We spent three years creating a series of tools and calculators that all fit together in a kind of expert system."
How does it work? "The basic problem is that there are two needs competing for the same resources," says Lorelle. "People want to pay for the college education of their children, but they also want to retire with financial dignity." The costs are high and getting more so; $11,000 a year for a typical public university; $23,000 for a private college, $33,000 a year for an elite private college-all in after-tax dollars.
The normal calculation performed by the advisory profession might say that the parents need to save $200,000 to send their kids to college. "Our system goes one step further, and says, let's identify strategies based on the universe of possibilities that are known to actually reduce the cost of college." The list includes possible savings and funding options, including various gifting strategies, EE bonds, Coverdale accounts, 529 plans, various kinds of loans, even IRAs and charitable accounts.
Plus a dose of understanding of how the system works. For example, if you have clients who have family income somewhere north of $50,000 and substantial outside assets, then the system will try to find ways to reduce the adjustable gross income below the $50,000 threshold (an IRA contribution? A charitable contribution?). Why? "You qualify for the simplified expected family contribution formula at any income amount under $50,000," says Lorelle. That means that outside assets are not counted in the financial aid formula.
"If you have $200,000 in assets, and they are not assessed," he says, "that could mean a potential cost savings, depending on the school, of $11,000 a year."
How does this relate to a client's retirement goals? "The future value of $11,000 each year at 8% could be the difference of $180,000 in retirement income," Lorelle points out.
"Whenever we can reallocate money for retirement without compromising the educational experience, we've accomplished our goal."
Of course, the strategies will be very different for the financial aid candidate and the individual with high income and assets. "If a client is a business owner, we might suggest
that they consider employing the child in their business," says Lorelle.
I think most advisors will get a user name and password, and have somebody in the office fill out the data forms. There are free reports you can access after each iteration, so there is some opportunity to try this or that solution and see what the impact will be. Once you arrive at a solution you like, the full plan costs $59 to download; the advisor would buy the plan and present it to the client, and pass on the cost bundled with his/her fees.
I played with the program myself for a day or so, creating several hypothetical clients. One, a small business owner with a junior in high school, reported $100,000 in yearly income, roughly $300,000 in various investments and an interest in sending his child to a prestigious university costing $41,820 a year in tuition, fees, room and board, books and expenses. One of the interesting things that jumped out at me immediately was that all I had to do was type in the name of the college and the program was able to estimate what the school's overall cost would be.
The program generated several detailed reports, which started by telling this hypothetical client that his expected family contribution was (gulp!) $20,981, based on the school's calculation methodology (some use the Federal while others use the Institutional methodology).
The report was amazingly comprehensive, outlining the possibility of granting appreciated stock to the child, creating a GRAT or GRUT to cover college costs, how to take advantage of the Hope Tax Credit (and where the phaseout limits came in), and some very interesting strategies that I, frankly, would never have thought of: employing the child in the small business (with the attendant increase in money transferred), and then setting up, through the business, an Educational Assistance Program that could provide a maximum of $5,250 a year for qualified undergraduate college expenses--fully-deductible.
The program also suggested that the hypothetical client buy a term insurance policy to make sure money was available to continue college should he/she die prematurely, and looked at the possibility of taking $100,000 in equity out of the house so that the hypothetical client could roll the money as a contribution into a Section 529 plan. From my conversation with Lorelle, CFS is not the biggest fan of 529 plans, but in this case the web site calculated that the client's monthly payment would come to $1,060.66-well below the $2,000 per month that he had intended to pay out-of-pocket each year to help fund college expenses.
The report indicated (correctly) that the client would have to be careful not to make additional gifts to the child for the succeeding five years, since this home equity contribution idea actually represented an accelerated gifting program for the husband and wife. But when the tax savings were added to the returns of the 529 plan, there seemed to be a better-than-even chance that this tactic would result in more money available for college funding.
In all, the client ended up with projected tax savings (there was no time-value-of-money calculation applied here) of $20,496 over five years, assuming the client followed all of the strategies outlined in the report.
This was followed by a report on the various possible types of tax advantaged or federally-subsidized loans--the Stafford Loans, PLUS loans, and loans that could be taken out of retirement accounts. My hypothetical client even received some helpful advice on applying for outside scholarships--along with the criteria that the child would have to meet to qualify.
A second report changed the numbers around and assumed that the hypothetical client was hoping to qualify for financial aid, and offered a few more interesting strategies: hiring the nonworking spouse as well as the student; accelerating business expenses in order to lower the income in the base years (raising aid eligibility); reduce your own wages from the firm during the college years to reduce income; put retirement money into a profit-sharing plan rather than a personal retirement plan, because (for some reason) the financial aid formula counts one but not the other. Alas, the report also suggested the possibility of moving liquid assets over into annuities or life insurance contracts, where they are not counted into the expected family contribution formula--but will generate commissions for the advisor who latches onto this strategy.
There are some limitations to the program that were mildly annoying but not deal-killers. For one thing, it's not easy to run different planning scenarios side-by-side; you have to go back and re-enter your answers to questions in order to preclude, say, a charitable strategy from the final recommendations. And the way the program is constructed right now, you would have to pay for each individual report you ran, even if they all involved slightly-different scenarios for the same client.
I really would have liked a chance to change the assumptions built into the calculation engine. It's good that they are so clearly disclosed, but not every planner expects 529 plans to generate 9% yearly returns, or mutual funds to generate 10% yearly returns. (The bond returns seemed more in line with current expectations-- 4% for corporates and 2.6% for short-term governments, and tax rates are taken from the tables.)
Finally, Collegiate Funding Solutions doesn't fill out the College Aid Form; you and/or the client still have to handle that chore separately.
My overall impression is that you probably should not present the outputs from this program directly to clients, but instead use it as a (powerful) tool to see what the possibilities are, what options you have, to make sure you haven't missed anything, and to simplify the calculations and in some cases eliminate the need for you to make calculations altogether. That way, you can suppress the life insurance recommendation, or the odd discussion of using oil and gas royalty programs as a high-growth investment opportunity, and focus on the strategic side of the planning.
But this feels like quibbling. Already, the Collegiate Funding Solutions site offers more information and advice than any tool I've seen, so it's a quick way for an advisor who is not expert to at least identify the funding and other strategies that are available. It passed another test: it didn't seek to game the system very much, besides offering some advice on repositioning assets inside the company, and the lamentable discussion of buying life insurance/annuities toward the back. Whether experienced college planners find the tool as useful remains to be seen; right now it seems like the best thing we have in our marketplace, reasonably priced and poised to get better. Check it out: http://www.collegiatefundingsolutions.com .
Republished with Permission: Inside Information, January 2005.
www.bobveres.com
