By Kanan Sachdeva
If you are like most parents, you probably see funding your children’s (and grandchildren’s) education as an important financial priority. Do you know how much college will cost you, and do you have a plan to get your savings where you want them to be?
Tuition costs keep increasing, with the College Board’s 2015 Trends in College Pricing Report listing the average annual cost for a four-year private university at $43,921 and an in-state public school at $19,548. Even with that price tag, college is still a worthwhile investment. Federal Reserve Bank of New York research from 2014 shows the annual economic return of a college degree has held steady at 15 percent for more than 10 years.1 This is due to the fact that the difference in earnings between college graduates and those with a high school diploma continues to rise quicker than tuition costs.
Which College Savings Option Is Right for You?
If you know that you want to fund all or even just a part of college for your children, there are numerous savings plans to consider. Here is a summary of six popular options.
529 plan: This flexible, state-sponsored program may allow contributions to grow and be used for qualified higher education expenses on a tax-free basis.2 One of the best features of a 529 plan is that you can enlist friends and family. When holidays and birthdays come around, suggest a contribution to your child’s college fund instead. Your family and friends may be happy to help ensure a secure future for the child they love, and it is a gift that has benefits to the giver as well: Numerous states allow tax deductions for contributing to a college account even if the child isn’t your own.
Coverdell Education Savings Account: This account is similar to a 529 plan in that your money grows tax free, and you pay no taxes on withdrawals if they’re used to pay for qualified education expenses. It differs in that it has income and contribution limits and can be used for elementary, secondary and post-secondary education.
Investments: Using investments to save for college is a flexible option, with no contribution limits and no restrictions on what the assets can be used for. The main disadvantage is the lack of tax advantages.
Permanent Life Insurance: Permanent life insurance can help provide funds to cover educational expenses in two different ways. First, owning a permanent life insurance policy can help ensure that if anything were to happen to you, your goals for funding your child’s education could still be met. Second, the flexibility of permanent life insurance lets you build up cash value that can be used via withdrawals or loans to help fund college expenses. The cash value of the policy grows tax free and generally may be withdrawn tax and penalty free up to the amount of premiums paid.3
Reward Programs: You can get more than frequent flyer miles with your credit card – there are point programs that let you build tuition credits and other rewards to help pay for college. The Upromise credit card program provides money back when you dine out, fill up on gas, shop online and more. Those rewards can often transfer directly to your 529 plan.
Prepaid plans: Certain states allow parents to lock in future college costs at today’s price if they send their children to an in-state school. These plans help to counteract the future increases in tuition. Because prepaid college tuition plans are not investments, your money is not subject to market risks and is often guaranteed by the states offering them. However, your college choice may be limited when this method is selected.
Other Ways to Pay
Beyond saving, there are other ways to make college a reality. Here are some additional ideas to include in your family’s higher education plan:
Grants and Scholarships: Think that you make too much money for your child to qualify for any financial aid? You may be wrong. Numerous colleges offer merit-based aid, determined by your child’s achievements rather than any financial need. However, to qualify you generally need to complete the Free Application For Federal Student Aid (FAFSA) form. Many families don’t fill out the FAFSA – don’t make this potentially costly mistake.
Loans and Work: These common options may help students close the gap between their college fund and their expenses. According to the 2014 Sallie Mae study “How America Pays for College,” 29 percent of students take out federal or private loans. A recent report from the U.S. Census Bureau found that 72 percent of undergraduate students also work while attending college, with one in five working full time.
Take Care of Your Entire Family—Including Yourself
With the many opportunities that are available, college can be a reality for your children, particularly with a little help from friends, family and the students themselves.
One last note to remember is that funding your child’s education should not put your own retirement at risk. If you sacrifice retirement contributions for college savings, you may end up having to work longer, changing your vision of what retirement means to you or even having to rely on your kids in retirement.
Children have options for funding their education with loans, work and scholarships; retirees don’t. Take the time to create a balanced financial plan designed to take care of everyone – including yourself.
Foot notes:
[1]https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci20-3.pdf
2If the money is used for a purpose other than qualified education expenses, the earnings portion of the withdrawal would be subject to then-current federal income tax plus an additional 10 percent tax penalty and any applicable state taxes.
3Any loan or withdrawal of cash value will reduce your policy’s death benefit.
No investment strategy can guarantee a profit or protect against loss. All investments carry some level of risk including the potential loss of principal invested.
(Article prepared by Northwestern Mutual with the cooperation of Kanan Sachdeva. Kanan Sachdeva is a Financial Advisor with Northwestern Mutual, the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, and its subsidiaries. Securities are offered through Northwestern Mutual Investment Services, LLC (NMIS), a subsidiary of NM, broker-dealer, registered investment adviser, member of FINRA and SIPC. Kanan Sachdeva is based in Southborough, MA. To contact Kanan Sachdeva, please call (781) 248-8640, e-mail at kanan.sachdeva@nm.com, or visit kanansachdeva.com.)
