College tuition costs continue to rise with no obvious end in sight. Including tuition, fees, room and board, the average net cost at private colleges is around $45,000 per year (Source: Trends in College Pricing—2016, The College Board). With this in mind, the projected cost of educating today’s newborn is staggering.
Consequently, whether you are considering a public or private college for your child, it is essential that your planning begin as early as possible. Many parents procrastinate because they feel the task is overwhelming, or they think that saving the required amount of money will force them to compromise their current lifestyle. While both of these concerns are legitimate, they need not stand in the way of establishing—and maintaining—an effective college funding plan.
The starting point for developing a plan is to understand the available funding options. Let’s take a look at some of them:
- Scholarships. While certainly desirable, there is no way to predict whether your child will qualify for a scholarship. Counting on scholarship money is similar to counting on lottery winnings—there are far more applicants than winners.
- Financial Aid. Usually in the form of loans, aid rarely covers total college costs. Even if you qualify on a “needs” basis, there is no assurance that the college of your choice will be able to help all those in need.
- Personal Income. Some parents expect to fund college expenses from current income. Would you be able to pay the current cost for one year out of your present personal income?
- Personal Loans. While generally available, they could prove costly over the long run when total interest charges are considered.
- Savings. This is the one funding option over which you have complete control. While it may not be easy for a young family to save, even small amounts can grow substantially through the effects of time and compounding.
Because of the uncertainty of all funding options except savings, it is critical to make personal savings the cornerstone of your college funding program. However, even a well-conceived savings plan is vulnerable. Should you die, your savings plan could come to an end.
To protect against this uncertainty, life insurance can help assure the completion of a funding plan. In addition to the protection aspect of insurance, the tax-deferred buildup of cash values can be part of your college savings plan, though not without impacting the policy. Distributions under a policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty. Access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, can increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
It is also important to know that life insurance cash values are excluded from the needs analysis formula for financial aid used by government agencies and most schools. This means that you can build an asset without being penalized when applying for financial aid.
All potential funding sources should be considered when developing a college funding program. However, a regular savings plan, along with life insurance, may be the best way to help ensure that your child will have the means to attend college. Let time be your ally by starting your savings program now.