College aid: Don't take the bait

  @Money January 14, 2013: 9:58 AM ET
col01 college aid

Some advisers promote life insurance as the tuition cure-all.

(Money Magazine)

If you're facing a $100,000 to $250,000 four-year college bill in the not too distant future, you probably see yourself not just as an anxious parent but as a pauper-in-waiting.

When some life insurance agents look at you, on the other hand, they see an ELF. As in "easy, lucrative, and fun."

At least that's how Tim Austin, founder of the National Association of College Funding Advisors, characterized parents of college-bound kids in a conference call last year to recruit new members to join his group -- which, despite its name, is actually an insurance marketing organization. (MONEY signed up for and attended the session.)

In a follow-up e-mail, Austin's NACFA associate Brian Kay urged prospective members not to miss out on "this obscenely profitable niche." And they aren't the only insurance pros positively giddy about the potential of the college market.

Hyperbole abounds on the websites of groups soliciting insurance agents and financial planners to join their forces and sell a combination of policies and advice to anxious parents: "Astounding results!" "A gold mine!" "Today's hottest market!"

For fees typically ranging from $800 to $4,000, these advisers -- who represent a niche within the college planning universe -- promise to help families save for college, pick good schools, and maximize aid.

The product many are promoting: life insurance. They tout guaranteed returns and point out that a loophole makes life insurance one of the few savings options that won't hurt a student's chances for need-based aid. That's mighty attractive to parents disappointed in 529 returns and frustrated by colleges' miserly aid packages.

Yet a four-month investigation by MONEY has found that, in reality, the people most likely to profit from this strategy are the planners themselves -- most of them insurance agents with flimsy college-planning credentials and, often, little understanding of financial aid.

Related: 10 most expensive colleges

Their insurance strategies, while attractive in theory, turn out to help relatively few families pay for school. And in too many cases, they do real harm by jeopardizing some kids' chances of getting into good schools, possibly lowering aid awards, and locking away or even losing family savings -- money parents may need to pay tuition bills.

What's more, while some of these sales practices violate the spirit and perhaps the letter of state insurance laws, regulators are largely unaware of them; a review of disciplinary action by federal and state authorities over the past five years found fewer than a dozen related cases.

"There are good college planners out there, but also too many who think the solution to every family's college funding problem is to buy an annuity or life insurance policy," says Lynn O'Shaughnessy, author of The College Solution. "They are snake-oil salesmen, and no one is policing them."

Contributing to the lack of enforcement action: Parents often don't realize they've been sold an inappropriate investment.

Why student loans are more affordable

"It can take years to become obvious you're stuck with what's essentially a worthless policy" for college savings, says Massachusetts Attorney General Martha Coakley. She adds that sharp increases in college costs, combined with the tough economy, make parents especially vulnerable to hard-sell tactics: "More financial pressure and more anxiety create more opportunity for scammers to take advantage."

Understand this: Not every college financial planner is just out to sell you insurance, and some of those who recommend a policy may genuinely have your interests at heart. Many also provide other valuable services, such as assistance picking colleges for your child and applying for aid.

The challenge for parents is to separate the genuinely helpful advisers from those who are merely looking to nab an ELF. The key is to recognize the bait they're dangling, then take the steps to avoid the trap.

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