School ‘daze’: Planning for your children’s education
With back-to-school season upon us once again, there’s surely one thing on every parent’s mind: How much is this year going to cost? Given the current cost of living, that concern is certainly justified. As the years tick by, and our children get older, it seems that we are rapidly running out of time … time to enjoy their childhood, time to enjoy family vacations, and time to save for their college education.
Parents with children currently in college know how astronomical the cost of higher education can be, while younger parents merely shutter at the thought of what the cost of college education will be when their children are of college age. Consider that $8,665 is the average total tuition and fees at four-year public colleges and universities in 2012-2013, an increase of 13.9 percent from two years ago. The total average tuition and fees at four-year private colleges and universities is $29,056, a 6.4 percent increase from a year ago. (“Trends in College Pricing.” The College Board, 2012). Dare we even speculate where college tuition will be a decade from now? We do know one thing for certain – college tuition will definitely not be lower!
With today’s unfavorable interest rate environment, coupled with an uncertain economy, where do parents turn to prepare for the cost of their child’s higher education over a decade from now? Most commonly in the past, the answer was 529 Education Accounts. With preferential tax treatment and an opportunity for an attractive rate of return thorough equities and mutual funds, 529 Plans seemed the obvious choice. However, in today’s economy, the choice may not be so obvious.
Consider this: You have been saving for your child’s education for a decade. Just a few years prior to their beginning college, BOOM! A stock market crash occurs similar to that of 2008, where investors lost an average of 41 percent of their investment. Now what? There isn’t enough time to pare your losses before tuition begins, so where do you turn?
As surprising as it may sound, many sophisticated investors are turning to Life Insurance to secure their children’s college education. You heard me correctly, Life Insurance. Of course, we are not talking about traditional Term Life, but rather Whole Life. Although at first mention, it may seem a bit unconventional, let’s consider the benefits of using Whole Life Insurance as an education fund versus the traditional 529 Plan.
With a 529 Plan, unless you want to be in a money market account paying .25 percent, there will be exposure to stock market risk. Do you want your child’s education to be contingent on a profitable stock market? Although contributions to the plan may be tax deductible, what happens if your child does not go to college? Using the proceeds of the account for anything other than a college education (it cannot be used to fund undergrad schooling) will result in a 10 percent penalty as well as a tax liability, since your contributions were tax deductible. Furthermore, the size of your 529 Plan will determine the amount, if any, of the financial aid you receive come tuition time.
Alternatively, with a Whole Life insurance policy for education, there is no exposure to stock market risk. Over time, your policy’s cash value earns guaranteed interest, as well as dividends. Since you are using post-tax dollars to fund the account, and this is “considered” life insurance, your money not only grows tax-free, but if done correctly, all withdrawals can be made tax-free as well! Unlike 529 Plans, if your child does not go to college, or if you should need access to your cash value for any other reason (elementary or high school education, a new car, home repairs), there is no penalty for withdrawals. Also, since this is a Life Insurance Policy, the cash value does not have to be listed on FAFSA forms when applying for Financial Aid. In addition to all of the preceding benefits, we have yet to mention perhaps the greatest advantage: Security. Life insurance creates a sum of money, which in the event of your untimely death, may allow your family to maintain their standard of living and keep future goals within reach.
Of course, whether you choose to use a 529 Plan or a Whole Life Insurance Policy, there is no guarantee that you will accumulate enough funds in time to pay for the entire college tuition. Depending on how much you were able to contribute and the timeframe that you had to work with, it is quite possible that you may fall a bit short. To bridge the gap between what you have accumulated and the cost of tuition, financial aid and student loans may be a viable solution.
For in-state students, Rhode Island Student Loan Authority (www.risla.com) offers several student loan programs with varying interest rates, depending on whether students wish to begin paying back the loan immediately, or defer their loan payments. Among other interesting programs offered by RISLA is their “Loan Forgiveness for Internships.” RISLA has launched a new rewards program to encourage students to pursue internships. Studies have shown that students who have an internship during college are more likely to receive a job offer after college than their peers who didn’t have an internship. With this new program, loan forgiveness will be awarded to qualifying borrowers on any non-federal loan held by Rhode Island Student Loan Authority. In order to receive loan forgiveness, the student must complete an eligible internship through an institution of higher education. Loan forgiveness in the amount of $2,000 per 3-credit internship (limited to one $2,000 forgiveness per student) will be awarded after graduation.
Parents planning for their children’s education certainly have several things to consider. Although neither Life Insurance nor 529 Plans are suitable for everyone, it is imperative to adopt a plan that meets your family’s current and future needs. In uncertain financial times such as these, it may make sense to think a bit “outside of the box.”
Christopher Conti is a Rhode Island Financial Services Professional. He can be reached at 743-0255 or Cconti75@gmail.com.