Alternatives to 529 Plans: Can You Save with Life Insurance?

College is costly, there’s no doubt about it. Yet the most common savings vehicle in the typical finance world is a 529 plan. However, these accounts can be problematic in your overall strategy. Read on to learn about alternatives to 529 plans, how to reduce college costs, and how to improve your overall college savings strategy.

The College Savings Conundrum

A high school senior, Delilah Moore, was accepted to her dream school, Oberlin College. And after days of soul-searching, number crunching, and seeking advice on Reddit, she turned down her #1 pick. The reason? According to the Yahoo Finance article, “I Decided Not to Go to My Pricey Dream School and I’m So Happy About It,” the decision “came down to the money.” This is financial planning for college students at its best.

Currently ranked as one of the top 20 priciest schools in America, Oberlin has a tuition cost of almost $60k. When room, board, and other expenses are factored in, students can expect a sticker price of over $75,000. Despite a generous scholarship, some grants, and aid from her parents, Moore was still looking at a significant debt in her first year of school alone. This, combined with her career aspirations, helped her decide to go with her in-state choice and save almost $100k in college costs.

It’s no secret that the student debt crisis is spiraling into a situation people are eager to escape. The total student debt in the US continues to creep higher and higher. Right now, the outstanding federal student loan balance is $1.606 trillion, and accounts for 91.2% of current student debt. And just when you think you’ve got a handle on tuition costs, you may realize that tuition inflates about 6-9% annually. Couple that with the fact that many students are taking more than four years to graduate, and you can see the conundrum.

How Do You Save for College?

One of the issues facing many parents and students alike is that they either haven’t saved enough money, or they haven’t saved it in the right places. One of the most well-known tools for college savings is a 529 plan, which is a stock-based investment that can only be used for education costs. While this also gives parents some flexibility to use these accounts for other education costs, there’s one major drawback to the 529 plan: the sequence of return risk. What happens if your child needs the money shortly after an economic downturn? For most people, college is not something to be delayed more than a few years. If the stock market crashes and you lose the money you have in a 529 plan, you lose it. There’s no way to protect that money from loss.

After 2007-2008, many newly minted high school graduates saw their college funds reduced by half or more. All of that savings and work from their parents disappeared. Even students who started school years later would feel this impact. And of course, parents and grandparents who saved diligently into these plans were devastated that their contributions seemed to vanish. Yet this is the unfortunate reality of assets that are tied to the stock market.

The solution we propose is to save into whole life insurance instead.

How to Pay for College with Whole Life Insurance

Just as we champion whole life insurance as your everyday savings vehicle, we want to suggest it for college savings as well. There are many reasons to love whole life insurance as a place to save your money, including:

• Whole life is not correlated to the stock market, which means the market’s whims can never negatively affect your cash value.
• Any time your cash value increases, it is the new guaranteed “floor” of your policy. You cannot lose money unless you remove it.
• Your cash value can serve many purposes. Being able to leverage your policy allows you to use it as a replenishing pool of money rather than a “one and done” source.
• You can use your cash value for any purpose, without oversight from the government or a bank. If your child decides they don’t want to go to college, they can use the funds for something else.
• Because the money is replenishing, you can use the cash value to teach your child important financial lessons while they grow up, such as how to finance purchases.
• In addition to a guaranteed dollar increase each year, dividend paying whole life insurance has a great track record.
• Does not have to be reported on FAFSA forms, which can increase your opportunities for grants and scholarships.

These reasons are truly just the tip of the iceberg. Ultimately, using whole life insurance to save for college is certain, liquid, and efficient.

Will Your Kids Want Whole Life Insurance?

There is, however, an elephant in the room that we should address. The most efficient way to use your cash value is through policy loans, which are loans from the life insurance company by putting your cash value as collateral. Doing this allows your cash value to continue to earn interest and dividends at the full compounding effect. Yet, a loan is a loan, and many people see college savings as a way to AVOID loans.

The tricky question that has been posed to us is, “How are my kids supposed to feel better using a policy loan for tuition that they have to pay back with after-tax funds?”

Unfortunately, none of us have a way to see the future and know what our children will want, or how they will feel. All we can do is our best for them, and hope that it’s enough. However, what we can do is continue to educate our children to the highest standard possible about financial literacy and responsibility, and hope that they see the value of leverage when the time comes.

The Power of the Policy Loan

When it comes to a policy loan, there are several things that make it much more valuable than a normal student loan. For example, children can repay these loans on their own schedule. There’s no deadline or timeline. While we recommend having a good habit of making payments, this provides some much-desired flexibility for college graduates. This gives them time to find a career they love and make some adjustments, without the added stress of mandatory loan payments. It can also help your children to have “skin in the game,” and commit to college because it’s the right decision, not because it’s paid for.

If you’re a parent and you’re unsure, we suggest keeping on the path that you are confident in and continuing to educate your children along the way. When it comes time for college, you can assess all the resources available on BOTH sides of the table. From there, create a strategy that everyone is happy with, based on what you have.

How to Pay for College: 7 Ways to Reduce the Burden

If you’re diligently saving into a whole life policy, yet you still want to find ways to reduce costs, even better! Just because you’re saving doesn’t mean you have to go the most expensive route possible. Here are some ideas for you and your children to further reduce the financial burden of college costs.

1. Get a Head Start

AP (Advanced Placement) programs and dual enrollment courses are offered in many high schools that can help students earn college credit before they graduate, and/or test out of required courses, thus reducing the college credits needed.

Even when all credits are not as transferable as hoped (colleges might accept them as elective credits yet not core classes), students reported that the AP classes helped them be better prepared for college.

2. Begin at a Community College

Starting a college career at a community college can make a lot of sense. Credits transfer easily to four-year institutions where the student can then focus on their areas of interest, with math, writing, and other requirements out of the way. Some community colleges are even offering 4-year degrees at remarkably affordable prices.

“I’m going to finish college with an RN degree and next to no debt by attending a community college,” celebrated Mark F., as quoted in a Community Action Duluth newsletter. “I pay $4,000 a year when my friends are going up the road to a university and paying $20,000 for the same degree!”

3. Learn Where You Are Planted

Four-year institutions are more expensive, to begin with, yet part of what makes college so pricey is the fact that most high schoolers move out to attend college. Adding room and board to your costs can almost double your annual price tag in some cases.

“Our daughter is commuting to a four-year university twice a week, while also attending a local community college twice a week for courses that will transfer to the university. She finished her freshman year debt-free by doing this and living at home while she can,” said Elizabeth R., commenting on a financial blog that asked readers to share their experiences.

4. Major in Scholarships

Beth’s two sons received $18k in scholarships their first year of college, the result of spending two hours every other Sunday afternoon researching and applying for scholarships. Beth’s advice to others is to “make scholarship hunting a part-time job… It will work.”

Good online resources to help you start your scholarship search include:

• Fastweb
• Scholarships
• Cappex

And don’t neglect local organizations, state grants, and school-specific funding!

5. Work Through College

Besides the financial benefits, there’s something to be said for encouraging the student to “have skin in the game.” When people work for something, they treat it with more care. Students are more invested in their success—literally—when they take part in paying for college.

Plus, students can gain valuable experience and confidence through work. And even if a student takes fewer credits at a time and takes longer to graduate, they’ll actually have a financial “head start” if they can avoid a mountain of debt.

Chris O. shared his tips for graduating debt-free with others on a Facebook page dedicated to reducing debt. “I planned for college ahead of time by joining the military, saving for years before I got out, and getting three well-paid internships. When I finished school, I had no college debt and money in the bank.”

6. Make Student Loans the Last Resort.

Too often, students take the full amount of loans offered because they can, or because they don’t know they have an option to only borrow what they need. But once it’s in their bank account, it’s easy to just spend it all. Plus, student loans often have strict repayment schedules, high-interest rates, and very little wiggle room upon graduation. Scholarships, grants, savings, and even policy loans can all be the first line of defense.

“My biggest piece of advice is don’t borrow for a lifestyle you want, borrow if and when you have to,” said Sam C., a financial aid officer in a comment on a financial blog. “Do your homework before moving in on campus. Can you afford it? If not, make other arrangements.”

7. Get an “A” in Financial Aid

Whether or not you think you or your child will be eligible for financial aid, you should fill out a FAFSA (“Free Application for Federal Student Aid”) and apply—on time—to every school you are considering. Just because you don’t qualify for financial aid at one college doesn’t mean another won’t offer a grant or scholarship.

Understanding how financial aid offices decide on grants and scholarships can help you increase your chances of qualifying for more. For instance, many parents do not realize that 529 plans and other college savings vehicles may actually sabotage their student’s chance for financial aid! That’s because they are counted as college money on the FAFSA application.

Money in IRAs and 401(k)s do not count as assets on FAFSA, yet those are a poor option for college funding. Not only is that money earmarked for retirement, but you’ll pay taxes and penalties to tap those accounts early.

However, there IS a place where you can save and use money for any purpose… where it can grow tax-deferred, and be borrowed against without taxation or penalty, and where it won’t count against you on FAFSA forms. We’re talking about whole life insurance cash value.

Valuing an Education

Higher education is a wonderful way to grow our minds as well as our incomes and careers. Yet that doesn’t mean you should pay more for a degree than what is necessary. We owe it to ourselves and our children to not let the cost of college become a burden.

Spending more—and especially borrowing more—doesn’t make college more valuable, just more expensive. We make higher education even more valuable by getting to graduation with less debt. There are also alternatives to a traditional education that can be considered. Online learning, mentorships, and entrepreneurship can be excellent choices, too, so don’t feel locked into the traditional college degree model as the only option.

If we can help you get started on your college-savings journey, we would love to hear from you. You can connect with us here, or you can reach out to us directly with your questions at welcome@prosperitythinkers.com.