If you have children, no doubt you’re concerned about the cost of a college education. Attending a college or university is more expensive than it’s ever been and the costs are continuing to rise. According to Student Loan Hero, the average tuition to attend a four-year public institution for students enrolled in state was $9,650 for the 2016-2017 school year. For the same period, a four-year private institution carried an average price tag of $33,480. When you factor in the additional $10,000 to $20,000 for room and board, fees, and books and supplies, the overall cost rises dramatically.
The Department of Education reported that the cost of college tuition rose 7.2% for four-year public schools and 6.4% for four-year private schools for the 2015-2016 school year.
What’s a Parent to Do?
It’s imperative for parents to begin saving for their child’s college education, regardless of when they anticipate college entrance. Planning for college can never begin too soon. Depositing funds into a traditional savings account clearly isn’t going to cut it.
Most people think of 529 plans when they think about funding their kid’s or grandchild’s college education. 529 plans have been touted as the favored means to accumulate tax-free growth for building the college fund. They offer tax-deferred growth with better returns than a savings account, making them an easy solution. However, there are some downsides to consider with 529s.
Right from the start, monies contributed to a 529 are investable in a limited number of pre-determined funds, meaning you have little control over how your money is allocated. Mostly investment-based, they are subject to market downturns which could be catastrophic if the downturn occurs close to the time a withdrawal is anticipated. If you’re planning to apply for federal financial aid, keep in mind that funds in a 529 plan are included in the calculation of a parent’s expected contribution. Further, tax-free distributions from these plans are strictly limited to qualifying educational expenses at accredited colleges within the United States. What if your child chooses not to go to college or wants to go overseas? If funds are not used for qualified tuition expenses, you’ll pay a 10% penalty in addition to ordinary income tax.
Maybe 529 plans aren’t all they were cracked up to be?
Life Insurance for a College Education
Another more powerful vehicle exists and that is cash value life insurance. Yes, life insurance as a vehicle for the living.
With cash value life insurance, you get the same tax deferred growth and tax free distributions through policy loans as a 529 plan without the 529 plan restrictions. In most cases, monies in the cash accumulation account of a life insurance policy can be withdrawn for any purpose, at any time, and in any amount without penalty. Depending on the type of permanent policy used, accumulation will be at a fixed rate or at a stock market index with downside protection; a floor on the index provides for 0% or no losses. Cash value in a life insurance contract is not included in the federal financial aid calculation and can thus reduce the amount of the expected family contribution.
What If My Child Doesn’t Go to College?
A properly designed life insurance contract won’t require the money to be used to fund only a college education, so it can continue to grow and be utilized to fund other major events in the child’s life such as a down payment for a home, funding their own children’s education, or their own retirement.
Lastly, let’s not forget, this is life insurance. Ultimately, the remaining death benefit will pass to the owner’s beneficiaries. Used strategically, a life policy can continue in perpetuity and can become a valuable family asset. The earlier one starts to fund a policy, the more powerful it becomes. When considering how to plan for college savings it is prudent to evaluate a permanent life insurance policy.
Planning for college shouldn’t be put off until a child’s senior year of high school. By exploring options and investing in education long before it’s due to begin, the ability to pay for college oneself and reducing the reliance on student loans can only help your child’s future.
All insurance policies are different. Be sure to review your insurance policy for specific information about coverages available to you. Nothing in this post is meant to suggest a guarantee of coverage.