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Saving for College

Saving for college

April 2020

College is an expensive facing almost every family. It can seem like a mountain to climb that just keeps growing higher and higher. Saving for college is important so that your child isn't burdened with a load of debt when he or she graduates. The statistics for graduates with debt that keeps them from moving forward with home purchases and families of their own is sobering at best.

There are investment tools that are available, with 529 plans most well known. The plan allows you to set aside money now on a scheduled basis so that funds are available when the child starts college. There is also life insurance that can be used for college savings. I will talk about the pros and cons of each.

The 529 college saving plans are written by financial advisors. The money typically funds a mutual fund of some type and is tied to market ups and downs. The growth potential during good economic times can be substantial. If someone was invested in 2009 and paid in for 10 years and took the money out, they did very well. The difficulty is that none of us knows when the market is going to ramp up and when it is going to drop. We have inklings, but not much more. That is one of the drawbacks of the plan. The money grows tax free and is also tax free on withdrawal if the money is used for a qualified educational institution and expense. This includes tuition, room and board ( discussed a bit later) fees and books and equipment. The money can also be used to pay on a student loan. There are a few drawbacks. Already mentioned is the uncertainty of the market and the ability to make payments if anything were to happen to the parents. After the first couple months of 2020, we have all seen how the market can drop suddenly and wipe out years of savings. Also, the plan is administered by each state, so the plan is for attending a college or university in that home state. If, like most parents, you are helping to meet the costs but not paying for all of them, some financial aid can be needed. When applying for financial aid, the assets in the 529 plan are counted and the result is lower financial aid. Many upperclassmen live off campus. Sometimes, as a parent, you would want to purchase a home in the town for your child to live in. It provides some control as a parent and assures that the living situation is what you would want. It also provides for the opportunity for investment growth. That is not permitted with a 529 plan. The other limitations are the schools approved for money to be used. Most trade or vocational schools aren't approved. If you have more than one child you might need more  than one 529 plan. The money can't be passed from one to the other easily since they are written for a specific beneficiary.

Life insurance as a saving plan for college has been around for a long time. It has been used by middle class and wealthy people to assure that money would be there for their children. The plans used are either whole life, which is a very conservative way to grow the money, but assures that the sum needed will be there if funded for it. The other plans are indexed universal life. The plans grow based on tracking of market indices. Although they won't grow as much as the market on a yearly basis, they will never fall from the point they are at. So a client who has an indexed universal life policy through me has not lost a dime since the market dropped. As the market has gone up some from its lowest point, the plan is making money, but it is making it on top of where it was at the beginning of the drop. That is a great benefit when you are saving for something at a particular time. The other benefit is that it can be used as you want. There are no restrictions. You can use it for whatever post high school learning is desired. If your child wants to go to school in Colorado, the money is there. If they want to go to LSU, the money is there. Maybe you grew up in the upper midwest and would like to see your children go to your alma mater. They can do it. The money goes where they go. If your child decides to go into the military, but plans to marry his sweetheart when he is discharged, save it to help with the wedding. We know how much they can be. You are in control of the money. Another benefit of life insurance is that if financial aid is still needed, the life insurance plan is not counted as an asset, meaning the aid is figured on the money you have to contribute out of pocket. That is a much better situation than with plans that are counted as assets by the financial aid boards. The plan can be written on the child, but it is much easier to write it on a parent if it is to be funded well. With an indexed universal life plan, funding can change to cover the cost of more than one child, as additional children are born. This brings on another benefit- you can continue funding the policy and use it as an additional retirement fund that will be withdrawn tax free. Alternatively, you can assign the policy to your child and they can use it towards retirement, purchasing a home or other expense. The only real downside is the fact that the life insurance policy premiums can't be deducted from taxes. 

Another thing to look at is the assurance of the money. None of us plans to die tomorrow, but it does happen. If money is being saved for a child's college, and Mom or Dad pass away, the money may not be there. With the life insurance policy, the money will be there if they were to die the next day. Life doesn't give us guarantees. The best we can do is to plan ahead and eliminate as many variables as we can. A life insurance plan can offer this in many ways. Talk to us to find out more. 

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February 14, 2020

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January 15, 2020

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