Bracing for the college tuition storm

With the economy in the doldrums and the long-term outlook for the U.S. stock market looking more restrained than it has in the recent past, it's more important than ever that financial advisers be a voice

of reason in their clients' quest to pay for their children's college education.

Fueled by a sense of desperation brought on by skyrocketing college costs and shrinking investment accounts, too many parents are dipping into their own retirement savings — or reducing or halting contributions to their retirement accounts — in order to send their children to college.

In 2011, 5% of parents of undergraduates withdrew, or borrowed, money from their 401(k) plans to pay for the cost of their children's college education, down from 9% in 2010 but up from 4% in 2009, according to a report released last week by Sallie Mae and Ipsos.

On average, parents shoulder the biggest share of college costs, covering 30% of such costs through their income and savings, and 7% through borrowing, the report said.

RETIREMENT RISK

In dipping into their retirement accounts, these well-intentioned parents are unnecessarily putting their own financial security in peril and likely will be forced to postpone, or significantly downsize, their own retirement dreams.

Fortunately, financial advisers are well-positioned to intervene. In fact, 33% of the parents surveyed recently by Fidelity Investments are turning to financial advisers for help in their college savings decisions, up from 21% five years ago, according to a Fidelity report that also was released last week.

Therefore, it is imperative that advisers be ready, willing and able to engage clients in realistic, “tough love” conversations about what they can — and, more importantly, cannot — afford in terms of putting their children through college. In doing so, advisers should be prepared to temper their clients' expectations about footing the entire bill — or most of the bill — so their children can avoid graduating with a lot of debt.

For many parents, even those that started saving for college when their children were in preschool, the prospect of paying for their children's college education is truly daunting. In fact, based on their current and expected savings, the typical American family is on track to cover just 16% of their projected college costs, down from 24% in 2007, according to Fidelity's study.

Of course, much of the parents' dilemma is due to the costs of a college education, which continue to rise sharply. Last year, in-state tuition and fees at four-year public colleges and universities increased 7.9% to $7,605, not including room and board. At four-year private institutions, it went up 4.5% from the 2009-10 school year to $27,293, according to The College Board.

To be sure, few advisers relish the idea of informing clients that they lack the financial wherewithal to contribute as much as they'd like to their son's or daughter's college education. Without a doubt, opening the doors to such a conversation means walking headlong into a minefield of good and bad parental instincts — one in which many parents would gladly sacrifice their own financial well-being to see that their children go to college.

But good financial advisers do not avoid hard truths.

They do not placate their clients with what they want to hear. Instead, they tell them what they need to hear.

Many parents need to hear that saving for their own retirement trumps saving for college. They need to hear that it's OK — even admirable — to expect their children to share in the sacrifices that come with paying for a college education.

Along those lines, advisers should also be prepared to present anxious parents with options.

AFFORDABLE ALTERNATIVES

Parents can, for example, encourage their children to attend public colleges or universities. For many students, especially those that seem to be wavering in their commitment to pursuing a higher education, community colleges are a viable — and more affordable — alternative.

Many parents also should be encouraged to expect their children to pay for college. They can do that, of course, by working part time, taking out low-interest government loans or some combination of both.

No matter what, it's up to financial advisers to present parents with options — and raiding their retirement savings should not be one of them.