College Savings

All parents want the best for their children. They invest time into building their child’s character and integrity as well as instilling in them core values that will hopefully stay with them through life. Many parents believe that if they spend the time preparing their children to face the world, it will be enough to make them successful.

Unfortunately, without a good college education, many of these intuitive, gifted young people will never reach their full potential. Business leaders today place a large and unprecedented value on having a quality education from an esteemed college or university. Twenty years ago, having a college degree may have helped you get a promotion. In today’s business environment, you need a degree just to get through the company’s front door.

Being able to afford that college education is difficult for all parents. According to the College Board, the moderate college budget for a year in an undergraduate program in an in-state public college for the 2018-19 academic year is $25,890 and public out-of-state is $41,950. A moderate budget at a private college averaged $52,500. If current trends remain consistent, educational costs could potentially rise by 5% annually. In the future, effective saving strategies for college are only going to become more important.

Bear in mind that all college savings plans, or strategies, are not created equal. The best plans offer lower expenses and special tax advantages to pay for college tuition. A smart college savings plan should hide your assets, helping you qualify for financial aid. Structuring a tax-efficient plan is important and can increase the potential of accumulating more money over time (as opposed to a taxable college savings option). There aren’t many plans available that allow you to secure your child’s future in the event of your death, the death of your spouse or a stock market collapse that affects potential investments.

Saving for your child’s college education requires a long-term commitment and sizable monthly or annual contribution to a plan or policy. In the same manner that you save for retirement, the earlier you start your plan, the better.

The right college savings plan, structured in a tax-efficient manner and constructed during a child’s younger years, will allow for college education choices to be determined by their grades and SAT or ACT scores, as opposed to which options are most affordable, or the scholarships they receive. The following are three of the most viable and popular plans:

1. 529 College Savings Plan

2. Cash Value Life Insurance Based College Savings Plan

3. Bank CD or Money Market Account

529 College Savings Plan

The 529 plan may be viable for children up until 12 or 13 years old because of the stock market investment component. These plans offer a few good tax advantages that no other plan offers except one that is cash value life insurance based. You would be able to learn more and compare the two most popular college savings options on the table below.

Cash Value Life Insurance Based College Savings Plan

Cash value life insurance includes whole life insurance and indexed universal life. These savings plans provide almost all of the advantages that 529 plans do while also eliminating their disadvantages. Cash value life insurance plan has it owned drawback – it only work well if you start very early while the child is very young unless you need to hide your money later on for the financial aid purpose.

 Feature 529 Plan Whole Life Insurance Plan
Tax advantages This plan is funded with after-federal-income-tax dollars. It also grows tax-deferred and tax-free for qualified tuition expenses. This plan is funded with after-federal-income tax dollars. It also grows tax-deferred and taken out tax-free as policy loans as long as the policy remains in-force.
Investment risk 529 plans are investment-based, providing opportunities to invest in predetermined funds or portfolios. There is no guarantee of return or principal unless it is invested in low- return, fixed-income funds. Whole life insurance-based college savings plan comes with guaranteed cash value and non-guaranteed dividends. There is no stock market risk involved.
Financial aid 529 plans are efficient for financial aid purposes, but are included in the calculation of a parent’s assets of expected family contributions. Life insurance values are NOT included in the federal methodology for calculating financial aid, so you will not be penalized for saving for college.
Non-qualified penalty If not used for qualified tuition expenses, there is a 10% federal excise penalty over and above any income tax. There are no such restrictions. Cash value in the whole life insurance based plan can be used for any purpose whatsoever.
Provides for the Death and/or Disability of Parent 529 plans do not have any insurance feature so if the person providing,the contribution dies; the plan may be incomplete and no sufficient college fund. It is a life insurance policy, covering the life of the primary income provider. If waiver of premium rider is added, it will be self-completing in case of total disability as well.
Can be used for Colleges outside of US It can be used for colleges abroad only if the college is accredited by the US Department of Education. No such conditions exist for whole life insurance based college savings plans.

Many parents today underestimate the huge financial commitment involved in financing a college education. If your child is pursuing a degree in law, medicine or other vocation that requires additional years of schooling, it becomes the second-largest investment in a parent’s lifetime, second only buying a home. For this reason, it is vital to start planning for your child’s education when they are very young – perhaps even during pregnancy.

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