A smarter way to save for college

Key Takeaways

  • Reasonably affluent people should budget $160,000 to $250,000 for each child (or grandchild) you plan to send to college.
  • You may be losing $40,000 to $60,000 per year in retirement money by funding college through 529 plans and other conventional methods.
  • Did you know that savvy families are using customized life insurance to save for college?

Is your glass half-empty or half-full? How you answer this age-old question about positive thinking may reflect your outlook on life, your attitude toward yourself, and whether you are optimistic or pessimistic — and it may even affect your health and wealth.

Indeed, some studies show that personality traits such as optimism and pessimism can affect many areas of your health and well-being.  A positive attitude lets you relax, remember, focus, and absorb information as you learn and grow.  You are ready to welcome new experiences and recognize many different kinds of learning opportunities.  And when you can see opportunities, hope increases.

When thinking about having to pay for college, you may feel there is little hope and limited options.

Distance learning may never be able to replace the on-campus experience, but study after study confirms the value of having a college education in today’s dynamic and ever-changing economy. You want to give your kids or grandkids a great head start in life, but you don’t want them to carry college debt into middle age and beyond—or bankrupt your retirement. That’s more easily said than done. Consider that the average U.S. family spends over $36,000 per year out of pocket for each child in a private college and nearly $23,000 per year for each child in a public college. Ouch!.

For successful families, who are finding it harder and harder to qualify for merit aid and financial aid as government funding dries up, the costs are even higher.

The cost of education is massively underestimated, especially when you factor in the serious long-term impact that a child’s (or grandchild’s tuition) has on your retirement planning. The true cost of education includes not only the actual tuition checks paid to the institution, but also room, board, books, travel to and from school, club/fraternity dues and a myriad of “fees.” But there’s a bigger cost that many people overlook in addition to the $160,000 to $250,000 out of pocket expenditure: Think about what the return on all that money you have saved (or spent) for tuition could have earned you through your retirement years. Using conservative, estimates, you may be losing $40,000 to $60,000 per year in retirement money by funding college through the typical methods.

My video about the true cost of education to retirement has more. WARNING: The stats are sobering!

There’s a lot to be said for 529 plans and other tax-advantaged college savings plans, since they’re low in cost, they grow tax free, they’re easy to reallocate and they can be transferred to other family members. But there’s one big drawback: they’re one dimensional. They lock up money that is dedicated to do a single “job” (fund tuition). With so many risks of change down the line, they don’t doesn’t offer any flexibility or control with your money.

When most people are “saving” for anything (educational, retirement, second home) the strategies and vehicles used to grow your investment have a certain amount of risk involved. The account balances can go up (and down) from time to time. When it comes time to actually draw down the money, you don’t know if all your money will be there when you need it the most—and then of course, there are taxes, potential penalties and government rules.

Opportunity cost

Lastly, even if all your planning goes well, the minute you start handing over large lump sums to the college (i.e. tuition checks), that money that took years to accumulate over the years stops compounding for you and you can’t use it again for the rest of the life. It belongs to your child’s or grandchild’s college. That’s a hefty opportunity cost well into retirement and even future generations.

Life insurance as a college savings tool

However, there’s another smart way to save for college–life insurance. That’s right, you can utilize a specially designed life insurance contract that guarantees cash value and interest that grows tax-deferred. When leveraged for college, the cash value of the policy can be accessed tax-free, and it can allow your cash value to grow uninterrupted for decades more. Even better, the cash value in your policy is NOT factored into your assets or income when applying for financial aid. If the cash is taken via a guaranteed policy loan, you control the payback terms – everything except for the interest rate to the insurance company.

Suppose your child gets a scholarship or would rather start a business than go to college? Not a problem. Unlike a 529 plan for instance, the funds in your cash value policy can be used for purposes other than education. That’s because those funds are not restricted.  Because the policy has protections against disability and death, it’s a self-completing asset even if health issues arise.  This means that even if you die or become disabled, the insurance company will provide a tax-free death benefit or continue to put money into the policy so your child’s and grandchild’s education can still be funded.

For example, what if the cash value that’s built up in your life insurance policy could be leveraged for a down payment of a rental property that your child could live in and rent out to other students? Not only could your child gain valuable experience managing rental property, but the other students would effectively help your son or daughter pay for their college costs.

Have someone else pay for your college…what a novel idea.

The beauty of this approach is that it gives parents significant control over the savings for their future– regardless of what the funds in the policy are used for. Even better, it protects against major health issues that would make it hard to fund a future college education.

Maximum protections and control…nice combo!