College Funding
Strategies to Help Your Client Save
Higher education expenses are among the most important financial considerations today. How much will it cost? When should savings start? How should savings begin? Paying for a kid's college education will likely be a combination of savings, financial aid, loans, part-time jobs and, perhaps, gifts from grandparents or other relatives.
How Much Will It Cost?
The news is filled with stories about rising college costs. While it's true that the cost of college is going up, it may be more affordable than some of your clients may think. According to The College Board, nearly 70 percent of college students attend four-year colleges where tuition is less than $8,000 a year and very few actually pay the “sticker price” of a college. That's because most receive some form of financial aid. Whether it's a loan, scholarship, or grant, 60 percent of full-time students attending public universities receive financial aid.
Typical college costs per year for a four-year education:
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Rising costs and inflation will both play a factor in future college costs. Check out these estimated future college costs or use the College Cost Savings calculator in the right column to estimate a client's own future costs and savings needs.
How Will You Pay?
It may be tempting to pay for a kid's education with retirement dollars or home equity. But ask your clients to think again. Taking out a home loan can seriously affect their retirement plans. How does making a second mortgage payment in your 80s sound? Plus, thye will be giving up the long-term growth potential that may not be able to be made up. Instead consider one or more of these alternatives:
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Coverdell ESA—Formerly known as the Education IRA, the Coverdell ESA allows for a maximum annual contribution of $2,000 per student. Your client can open an account with a bank, brokerage, or mutual fund company, send in a contribution, and choose his investments. Earnings grow tax-deferred if the distributions are used for qualified educational expenses, however contributions are not tax deductible.
529 Plan: Prepaid Tuition—With prepaid tuition, an investment can buy a given number of tuition credits at an in-state public college or university at today's prices. Regardless of future tuition increases, the number of quarters, semesters, or years purchased today are guaranteed. This guarantee may not apply if a child attends an out-of-state school.
529 Plan: College Savings—All states have established 529 plans, each with its own version. In general, the plans allow parents, grandparents, or others to set up an account for the benefit of the future student. Maximum contributions vary by state. Parents may invest in any state's plan and the money can be used at colleges and universities throughout the U.S. If a child decides not to go to college, this plan can be rolled over to another family member. Earnings grow tax-free if used to pay for qualified higher education expenses, including tuition, room and board, books, and even computers. This tax treatment applies for distributions through 2010. If Congress doesn't extend this tax break, qualifying distributions made after 2010 will be taxable to the beneficiary (earnings portion only).
Life Insurance—Life insurance can help fund a child's education in two ways. First, premium payments provide a death benefit. For most parents, it will take years of hard work and sacrifice to be able to send a child to college. They don't want to risk all that hard work and their child's opportunity for a degree by failing to plan in case the client were to die prematurely.
Second, life insurance can help save money over time by accumulating cash value within the policy. This can be used tax-free during a client's lifetime through withdrawals and/or policy loans to pay for college expenses. (Withdrawals up to policy basis are tax-free. Withdrawals and unpaid loans will reduce the available death benefit and cash value and excessive loans or withdrawals may cause the policy to lapse.)
The cash value of a life insurance policy has no restrictions on how it can be used. So, if a child does not go to college, the value in the policy can be shifted to another financial obligation like paying off a home mortgage, adding to a retirement plan, or letting it accumulate to grow the death benefit protection. Under the federal financial aid formula, cash value life insurance policies are not taken into account when considering parental assets. Thus, the amount of federal financial aid a child is eligible for is not reduced because a life insurance policy contains cash value. |
How Can Ameritas Advisor Services Help?
Before your clients invest in any college savings instrument, help them weigh the factors. Estimate the amount needed to save for college, consider money saving alternatives, and discuss the different options available, including life insurance. If you think life insurance makes sense for your client, call the Ameritas Advisor Services professionals.
These ideas reflect our current understanding of applicable law. Ameritas Life Insurance Corp. and its representatives do not provide tax or legal advice. Consult your own tax or legal adviser regarding your unique situation.
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