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Chalk Up Long-Term Education Savings with an SBLOC

Derek Glitz, VP Business Development | Institutional Banking | 6/25/2020 4:14 PM

An SBLOC can help minimize the long-term costs of a college education.

Advisors are coming to that time of year when parents are looking for advice on how to fund their child’s college education. Combined with parental pride is the fear that the rising cost of college may limit their child’s choices or prevent them from going to college at all. While the number and amount of 529 savings plans is on the rise, they still may not be enough to cover tuition and living expenses for a four-year college education.

When considering their options, parents may immediately think about student loans. While they can offer some immediate financial relief, they can also be problematic in the long run.

As of June 2019:

  • The average 529 education savings account held $25,128.1
  • The 2019 average, annual college tuition cost for a four-year program2, including living on campus, was:
    • $26,590 for an in-state public school
    • $42,970 for an out-of-state public school
    • $53,980 for a private college

Student Loans: Borrow Now, Struggle to Pay Later

Parents and their college-bound children may view student loans as a quick fix to finding some or all of the funds needed for college. However, they may not know or consider that aside from borrowing limits and time-consuming application processes, student loan approval is not guaranteed.

In addition, the U.S. is experiencing historic levels of both student loan debt and loan default rates. In 2020, U.S. student loan debt reached $1.56 trillion.3 Meanwhile, the Federal Reserve has released some sobering statistics indicating that graduates are having difficulties making regular loan payments:4

  • Total U.S. borrowers with student loan debt: 44.7 million
  • Student loan delinquency (90+ days late on payments) or default rate: 10.8%
  • Direct Loans - Cumulative In Default: $119.8 billion (5.5 million borrowers)
  • Direct Loans in forbearance: $122.9 billion (2.8 million borrowers)

Considering these statistics, it may be a natural conclusion that borrowers in default have substantial loans. However, the average student loan totaled $32,731, with an average monthly payment of $393.5,6 If your child’s career choice involves more than four years of college, the loan amount and monthly payments can rise exponentially.

Given the current state of student loan debt, parents concerned about their child’s long-term interests may consider selling off portfolio assets or taking out traditional loans. However, The Bancorp has another option for parents to find liquidity in a timely, efficient manner.

SBLOCs: A Cost-Effective Solution for Financing a College Education

Advisors and clients can turn to The Bancorp Securities-Backed Line of Credit (SBLOC)7 as an option for paying college tuition. Using an SBLOC, clients can efficiently and effectively leverage non-retirement-invested assets to secure a flexible, fee-free8 line of credit by pledging their investment portfolio as collateral. With a streamlined application and funding process, parents can make timely payments for college tuition, room and board and other expenses.

SBLOCs may also enable clients to save money when compared to other funding options, including:

  • Taking out home equity loans or other lines of credit that have burdensome application and underwriting processes, as well as closing and maintenance fees.
  • Liquidating portfolio assets which result in untimely capital gains or losses and disrupt investment strategies.

Most importantly, SBLOCs provide convenient access to liquidity to pay for education costs and meet other cash needs all year long.

If you work with clients who have tuition funding needs, an SBLOC may be a great addition to any non-qualified investment portfolio. Clients can apply for an SBLOC account when opening their investment accounts, allowing them to be prepared for mounting educational costs.

1. Kershner, Andrew. “Americans save a record amount in 529 education plans — why that’s not necessarily a good thing”. October 2019. https://www.marketwatch.com/story/americans-save-a-record-352-billion-for-college-in-529-plans-why-thats-not-necessarily-a-good-thing-2019-09-27

2. The College Board. Trends in College Pricing 2019 Report. https://research.collegeboard.org/pdf/trends-college-pricing-2019-full-report.pdf

3-5. Friedman, Zach. “Student Loan Debt Statistics in 2020: A Record $1.6 Trillion”. Forbes. February 3, 2020.https://www.forbes.com/sites/zackfriedman/2020/02/03/student-loan-debt-statistics/#ef9bd18281fe

6. Federal Reserve and New York Federal Reserve statistics as of Q3 2019.

7. The SBLOC is a non-purpose loan, the proceeds of which cannot be used for the purchase of securities or to refinance a loan used to purchase securities. Clients should consult a tax advisor for tax-related matters and an attorney for legal matters.

8. The Bancorp Bank does not charge an application fee. State, local, and/or third-party fees may apply in some states.

Securities-based lending has special risks and may not be suitable for everyone. Financial advisors should ensure that clients understand any associated risks.

 

The opinions, findings, or perspectives expressed in this content are those of the author and do not reflect the official policy or position of The Bancorp, Inc., its affiliates, or its or their employees.