TUESDAY, FEBRUARY 27, 2018
JIM: According to a recent Wall Street Journal report, the class of 2014 just made history in the worst imaginable way. They’ve officially been named the most indebted class ever with average debt of $33,000 per student, up from $31,000 in 2013 and $10,000 in 1993 and since 1993, we’ve had the percentage of students taking out loans for college has risen from around 46% to 70%. Joining us today is Brock Jolly. He’s also known as the College Funding Coach and he has done workshops and seminars for families throughout the Northeast, teaching them the ways to save for their kids’ and grandkids’ college. Welcome, Brock.
BROCK: Hi there.
JIM: Hey, I’m really pleased to have you with us today and I know I just mentioned in the beginning that we have the most indebted graduating class ever. I think you’re probably the man to help reverse that trend because you’re known as the College Funding Coach among your peers. Give us a little bit of background as to what prompted you to be so interested in the subject of college funding.
BROCK: Sure, thanks, Jim. I got into this business – sounds funny – right at the turn of the century so 1999/2000 timeframe and I always explain it you think about the stock market in that era. Things were really going gangbusters. I always say untrained monkeys were throwing darts at dartboards and couldn’t help but make money and then immediately after I got into the business, what happened? Bottom fell out of the market and I always tell people it was not entirely my fault. However, things went way south and the question that I kept hearing from parents as I was getting started in the financial planning industry is how in the world am I going to pay for my kids’ college education? At the time, being brand new in the industry, quite frankly, I had no idea but what I did have at that time is just that, I had time and so I really started to research ideas and strategies and tactics and tools and products and everything out there to say you know what? We’re going to figure out a strategy. In 2002, I started to teach this class originally through an adult education program and then it just sort of blossomed from there and then, obviously, everybody knows what happened in 2008. Things haven’t gotten easier over time and I think it’s caused the problems to be even greater and the need for somebody who really focuses on this to be sort of at the forefront of people’s minds as they’re planning for sending their one or two or three kids to college.
JIM: As a parent, just had a couple of my kids just graduated this year.
JIM: Thank you. It’s a great feeling to know we’re done with that chapter hopefully.
BROCK: I was going to ask you. Are they officially off the family payroll?
JIM: Yeah, we’ll move along right now but now the next thing is I know they’ve got about 50% unemployment. Is that something you do as your counseling kids and parents as to knowing what that next result is? With high unemployment, I know a lot of kids just kind of go to school and then okay, now we’ll see if we can get a job instead of hey, what should I train for so when I get out of school I can get a job. Is that something you have resources available to help with that?
BROCK: Yeah, I always tell people that’s not our unique ability. That’s not what we do specifically. However, in having done this for a dozen years, we have lots of relationships with college and career counselors where that is their expertise. The unsolicited advice I give to families all the time is a lot of 18-year-olds aren’t necessarily ready to go to college and if they’re not ready to go to college, maybe you shouldn’t spend $20,000, $30,000, $40,000, $50,000, $60,000 on their college education. I think there’s lots of good programs, lots of gap year programs, things that kids can do to sort of self-discover what their passions are and determine what a career path may be.
JIM: We always talk on this program about how important it is as having a teen when it comes to estate planning, retirement planning, and when you’re talking about college funding, it’s just as important. You need a financial advisor, someone that knows the rules, knows the ropes, but you have to know what to plan for and that’s where those folks come in, the college guidance counselors, ones that really have an ear to the ground as to where the job market is and understanding the skill set of that student to help steer him in a direction of not only having a job that will pay the bills but something that can give them a personal sense of satisfaction.
BROCK: To build on that, as an example, maybe somebody’s going to be a music major. My mom was a music major so near and dear to my heart. The challenge is a lot of those folks, the way our economy is, they’re either going to come out and they are going to be aficionados and be excellent in that and make lots and lots of money or they’re going to come out and they’re going to be starving artists and waiting tables so my recommendation is always figure out something that’s more of a core discipline. Use economics as the example. Maybe they’re a music and economics major, which is great because now if they are wildly famous and make lots and lots of money, they’ll have the economic background to be able to manage that money or if they come out and they’re a starving artist, at least they’ve got something to fall back on as a career path.
JIM: It’s interesting as you’re talking about this. My own son graduated with a double major, one in acting and writing and the other one in marketing. He’s coming to work in the family business. We’ll see how that works but all his friends, they’re working in grocery stores or waitering or waitressing. They’re going the same thing they were going through school.
BROCK: That’s right.
JIM: Because there’s really not those jobs available and you really have to take a realistic approach. It’s great to pursue your passions but you have to pay the bills and you’ve got to make sure you have a plan to take care of that, especially if you’re going to be taking out student loans so let’s get into some of the rules of the game when it comes to college savings.
BROCK: Sure, Jim. A lot of the rules may be very, very clear but maybe not so clear. One of the things, when we deal with the high schools as an example, a lot of times the high schools are very, very good at helping families choose their courses that they need to take, how to prepare for the standardized tests, how to choose the right school, and even as much as what the student aid forms are, what they need to complete, and that sort of thing. What they don’t do is take the next step and that is for some families, they do their FAFSA, they do their CSS Profile, and it says here’s the amount of aid that we expect you to provide towards your college education. That’s also known as the expected family contribution. What the schools don’t do is tell you where do you go from there? That’s what our program does is takes that expected family contribution, not as the ending point but really as the starting point to be able to educate families. If you can qualify for need-based aid, we want to show you how to legally, morally, and ethically maximize your ability to qualify for need-based aid. If you can’t qualify for need-based aid, that’s okay but now if you think about it, think about most families out there and I think this is true whether you’re from Washington, DC, or you’re from Pocatello, Idaho. Your money is generally inside of your retirement plans and inside of the sticks and bricks of your home equity, which is excellent for retirement. It’s not so excellent when you need to send your child to school. If you’ve got one or two or three or four kids to send to school, you need liquidity. You need cash flow and so the rules of the game really are just understanding how those formulas work, understanding whether or not you’ll be eligible for need-based aid, and from there making some strategic decisions about how you may make your money work for you.
JIM: I’m in my early 50s and my wife and I started fairly young having children and a lot of our friends now have kids that are now in college or entering college a couple years behind and starting a family and I think a lot of them have some pretty big misconceptions when it comes to grants and loans and things like that because back when I went to college, loans were there for the asking. You just had to kind of sign a piece of paper and get the money and I knew friends that used student loans to go on trips to Europe and pay for spring break but it’s a different world out there today, isn’t it?
BROCK: Different world totally. Also, the biggest misperceptions are you get sort of both ends of the spectrum. You get some families who think man, I was looking at these schools. They talk about how much money exists out there. I’m going to get plenty of money and I don’t have to worry about it or others who say I live in Palo Alto, California. I make a good living. I’m never going to qualify for need-based aid and our take on it is maybe you’re right, maybe you’re not but wouldn’t it be good to know definitively and literally you can figure out pretty close to what those expectations are within about 10 or 15 minutes of just plugging some numbers and determining what your ability may be to qualify for aid and then also looking at what your current snapshot is and determining what kind of loans may be available to you and as much as anything just creating a strategy because so many families really just sort of end up winging it when if you’d taken some time to do some more comprehensive planning, you may be able to find resources that you in some cases didn’t even know that you had.
JIM: Another thing I learned and the rules changed literally when my oldest son was in college. I had a situation with him where he maybe should have taken a couple years off prior to starting school because he was one of those kids that wasn’t maybe ready to start right away. He blew through a lot of his college savings money the first year. Then we stopped supporting that and he was able to get a student loan for his second year and then things came to a crashing halt when after that he was going to be required to have us cosign for a loan, which I wasn’t quite prepared to do and I know in counseling with a lot of clients where they’ve had kids where they’ve helped them get college student loans and I say now did you cosign for it? Yes. I said is that loan forgiven if something happens to your child, if they pass away or whatever, and they look at me like a deer in headlights and here they’ve just cosigned for $50,000, $60,000, $70,000, $80,000 and if something happens to that child, they’re just approaching retirement with an $80,000 loan possibly that they have to pay off or a debt that they weren’t really thinking of the consequences so the rules have definitely changed. When we come back – we’re going to take a short break – let’s talk about some of the things parents can do to help prepare for the funding of that education.
JIM: Welcome back as we continue to visit with Brock Jolly. Today, we’re talking about college funding, trying to dispel some of the myths that exist and give people a realistic approach in funding their kids’ or their grandkids’ college education. Brock, you’re known as the College Funding Coach and we talked about the 2014 graduating class being the most indebted ever and all the misconceptions that are out there. Hopefully, we can shed some light on the subject because so far it’s been mostly gloom and doom. Let’s start talking about some of the solutions where parents can realistically plan for a good quality education for their kids. What are some of the things that you’re talking to parents about, Brock?
BROCK: Great question. I think one of the things is very simply creating a comprehensive plan. One of the greatest tools that we as advisors have at our disposal are the Section 529 plans; 529 plans are just that. They’re a tool but to my knowledge, there are virtually no other financial instruments that allow, in many cases, an up-front tax deduction, depending on your state, tax-deferred growth, tax-free distributions. The message here from Congress and the IRS is very loud and clear. We want to give you an instrument that you can utilize to limit your drag on the portfolio, give you incentives to save for higher education. I think it’s vitally important so in our practice, we use a lot of 529 plans. We create a lot of strategies. I love any time you can take tax-free distributions so a lot of times we’ll use instruments like municipal bonds or cash value life insurance, lots of strategies where you can build that comprehensive approach to something as simple as college funding.
JIM: Yeah and one size doesn’t fit all. It all depends on your circumstances, tax brackets but one of the beautiful things about the 529 is prior to the 529s, we had these educational IRAs and they had a lot of restrictions and limitations to them but the 529s literally you can have a multigenerational approach to funding college savings so a lot of times we see and maybe you see this too where grandparents have the means. They can put in a lump sum for college with the peace of mind of knowing that if their oldest grandchild that they just put this money in decides not to go to school, now we can transfer it down the line to the next grandchild or the next grandchild or if they go in a profession like teaching, they have to take continuing education and it’s something that can help fund those expenses as they get older. It’s not limited to age 30 the way the old programs were. It literally can be a multigenerational planning tool for education.
BROCK: That’s right. As an example, in my home state of Virginia and a lot of states work this way but the Virginia plan as an example, a grandparent over the age of 70 can give money into a 529 plan. They can deduct up to $70,000 of contributions off of their state income taxes in the year of contribution. We’ve done some things using life insurance strategies where the dividend builds up. The cash value builds up. Now you can use that money to fund a grandchild’s college education. Sky’s the limit in terms of what the strategies are and really it’s just taking a unique approach to a client’s specific circumstances.
JIM: Another key too is for clients that may not be sure if they can afford retirement funding and maybe fund the college savings is IRAs. They’ve expanded the IRA qualification rules as far as qualified distributions. If you’ve got a tax-deductible IRA, money can be extracted without penalty. Now you may have to pay tax when you pull the money out but it can be pulled out without penalty.
BROCK: Yup, you avoid that 10% penalty.
JIM: To fund college spending but if you have a Roth IRA, for example, the advantage of a Roth IRA is the money doesn’t have to be used for college but could be so there’s many tools in the toolbox today that we didn’t have just a few years ago.
BROCK: Just to build on that, we’ve got a client who owns a small business, four children. The two oldest boys were working in the business. I asked Dad how much are you paying the boys? Well, we’re not paying them anything. Well, what if you started paying them? Long story short, they paid the two sons. It came out to roughly $14,000. As a result, they’re able to save almost $5000 a year by shifting income from the parents’ very high income tax bracket to the child’s very low income tax bracket. Now what they did is they actually took that roughly $5000 and used it to fund the boys’ Roth IRAs. They knew they wouldn’t ever qualify for need-based aid but they said how do we keep more of the money that right now we’re sending to the IRS and when I say a legal, moral, ethical strategy, that’s totally legitimate. The kids are working in the business. They’re now getting paid. Mom and Dad say okay, son, this is money that has to be used for college. This is not your weekend going out to the movies fund. This is your college fund but it’s just shifting that income tax liability from the parents’ income tax bracket to the child’s income tax bracket.
JIM: One other thing that I’ve started talking to clients about too is there’s term insurance policies. If people have limited means and they want to protect themselves if they’re cosigning loans, I’ve had clients where for literally $100 to $200 a year could get a term policy on their kids so when they cosign for those student loans, if they’re going to go to school and acquire $80,000 or $100,000 of debt or, God forbid, they go to medical school and acquire a quarter million dollars of debt, you can easily insure that for just a couple bucks a month. I think every time I look at it, it’s about $35 per $100,000 of coverage and then you just add a policy fee, typically $60 or $70, so for really a couple hundred dollars a year, you can make sure you’re not assuming all that risk in case something does happen to your child so there’s the protection side. You talked about cash value life insurance. There’s the 529s. You talked about some of the unique things with your state in Virginia but the bottom line is there are so many opportunities. When a child’s first born, you have 18 years to fund that college education but if you wait until they’re a senior in high school, it can be a daunting task. Talk a little bit about what the cost of college is today, private versus public schools today.
BROCK: Sure, yeah, great question. As somebody who has just gone through this, I would say that 18 years flies by. I’ve got a 7-month-old son at home and as the College Funding Coach, my wife always jokes with me if you can’t figure out how to pay for your kid’s college education, then we’ve got bigger problems. You look at it and you say in today’s dollars, the average for an in-state public school – and this is cost of attendance, meaning tuition, room and board, books, computers, supplies, everything – all in is about $23,000 annually. For a private school or for an out-of-state school, it’s about double that, about $45,000 per year. For the elite and the Ivy League schools, you’re talking about $58,000 on up. Most expensive school in the country right now – I’ll allow them to remain nameless – but is $64,670 annually. Now the good news, Jim, is they’ll take cash, check, credit card, wire transfer, however you want to pay for it. That’s a big amount of money for the average family to come up with. Then you add on top of that hopefully they graduate in four years. One of the biggest reasons that those debt numbers are what you referenced previously is most kids aren’t graduating in four years these days. They’re graduating in five and a half or six years.
JIM: Yeah, I looked at my own family. My daughter graduated with a major in marketing and then a minor in Spanish and it took her five years to graduate. My son had a double major, as I talked about earlier, that took six years. Just because it takes longer, one of the other issues we faced is after you take so many credits, they wanted to start charging graduate school rates, which were much higher. My son was always able to negotiate somehow an exemption from going to those higher fees but boy a kid goes on to school for a doctorate or a PhD or whatever master’s degree, they’re going to be looking at much higher costs once you get to those secondary degrees.
BROCK: Yeah and I think we as consumers tend to have sort of a romanticized view of college. Colleges are big business. If you don’t realize that it’s a sales process and not only are you selling to the school but maybe more importantly, the schools are selling to you. Think about it. Harvard has about $36 billion in their endowment. Their goal is to give you as little of that money as they need to to entice you to come to their school right but if you can’t afford Harvard and you get in, they’ve got the money. They’ve got the resources to be able to attract you but the key is for most of these schools use minimum resources to attract the student because you think about most state schools and even the more elite state schools and some private schools, on average most of them get somewhere in the neighborhood of 20,000, 30,000, 40,000 applications per year in order to fill anywhere from maybe 2000 spaces to 10,000 spaces for a class. They’ve got the pick of the litter in terms of who they can choose to fill out that class.
JIM: I think the moral of the story is all of us will load up on our GPSs or on our phones or whatever. When we’re going to go on a trip, we’re going to look at where the construction areas are. We’re going to anticipate where we’re going and having a plan so we get where we want to be so if our goal is to have a student graduate with a degree that’s going to help them find gainful employment, you can’t start planning too early and you might be modifying that plan as you go along. When your child’s first born, you don’t know if they want to be doctor or a fireman or an astronaut or what they want to be when they grow up but as they go along, you really can start planning. All the kids need to take those basic courses and having a plan as to how much you want to pay toward that cost, how you’re going to set that up, and then having a realistic expectation then how much are you going to need to put away. Again, you wait until the kid’s a senior in high school, it’s a pretty daunting task. You start putting a little bit away right in the beginning. One of the beauties with the 529 plans is a lot of these programs offer friend and family programs so instead of buying a gift that’s broken and forgotten in two weeks on a birthday, they can throw in $50 into the college savings program, the 529 plan. With a little bit of planning with your advisor, you can set these things up to make it a lot easier and a lot more attainable so that your kids when they graduate aren’t the record class of the future.
BROCK: That’s exactly right.
JIM: Well, I want to thank you, Brock, for joining us. This has been great. Before we finish, is there any resource that you would guide people to to help in this planning process?
BROCK: What I would say is we’ve really designed our website to be a great resource for parents, whether they’re right in our backyard, and for advisors for that matter, so we’ve got links to lots and lots of websites. We’ve got the expected family contribution link, tons of resources, and that website is thecollegefundingcoach.org so if you’d like to check that out, great resources. If anybody has any questions, feel free to reach out to me. I’m happy to be a resource for you.
JIM: Alright, thanks a lot for joining us.
BROCK: Thanks for having me.
JIM: Thanks for joining us this week and tune in again next week as we explore another phase of the Real Wealth process. Remember, if anything you heard in today’s show you’d like to get more information about, contact your Prism Insurance Agency advisor. Also, if you feel that any of this information would be helpful to a friend or family member, just click the Forward to a Friend button.
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