If you are a family with annual income more than $300,000, and with kids about to enter college, you should read this Financial-Planning article which describes 5 ways wealthy families could or should do in order to pay less for college.
Below is an article from American National about how to use its Signature GUL product for collect education planning.
There are many ways to cover the cost of a college education. The cost of a college education has gone up to the point that it is difficult to pay for and college loans follow the graduate for the remainder of their lives due to the interest on the loan and the long repayment schedules.
Many individuals point out that 529 Education plans are the way to fund college education. If the money is used for qualified education purposes it can grow tax-free and be removed from the plan tax-free. However, if the money is not used for qualified college education costs, the growth of the money becomes taxable and subject to penalties when withdrawn. Also, typically the money is conservatively invested for lower growth and safety but is still subject to market downturns. The plan is not self-completing in the event a parent or grandparent funding the plan dies. 529 Plans have funding limits subject to annual gifts (five years at a time). Lastly, 529 plans only serve one purpose and that is college funding.
Funding College Education with Life Insurance
An advantage of life insurance not enjoyed by any other funding vehicle is that the plan is self-completing if anything happens to the individual funding the policy. If someone dies, they will know they have fully funded the education obligation. Any other savings vehicle may suffer a shortfall if the individual funding the education plan dies before funding is completed. Cash Value in a permanent life insurance policy is not currently a countable asset when applying for FAFSA financial aid.
Signature Guaranteed Universal Life
Signature GUL has unique features that can make this a match for saving for college education. The death benefit is guaranteed if premiums are paid and no loans are taken so that if a premature death occurs the death benefit will be there to help cover the cost of college education needs. Signature GUL also has the Guaranteed Cash-Out option that allows a partial return of premium after 15 years and a full return of premium after 20 and 25 years, up to the Cash-Out benefit maximum. Depending upon the timing, the policy can be turned in for a return of premium and the premiums can be used to fund college education. In the meantime, the individual funding the policy has guaranteed protection to self-complete the education funding needs and cover other needs as well.
Darrell and Christine, age 35, felt they needed life insurance protection for Christine and their two young children in the event something happened to Darrell, who was the primary means of support.
The couple also wanted to have the option to help their children pay for their education. They talked to their Financial Advisor and determined a $500,000 Signature GUL policy could help cover several of the risks faced by their family.
In the event that something were to happen to Darrell, they would have protection for the family that could cover education costs for the children, pay off the family home, provide Christine funds to run the home, and provide some funds to put away for her retirement.
Then, the Financial Advisor showed them that the Cash-Out Rider included on the Signature GUL policy would allow them to surrender the policy in exchange for a partial return of premiums at the 15th anniversary or a full return of premiums paid at the 20th, or 25th anniversary1. If the family found they no longer required insurance on Darrell, the premiums paid over the years could be paid out and re-purposed to help pay for their children’s education or student loan repayments.
Lastly, their advisor added that the policy also included Accelerated Benefit Riders for Critical, Chronic, and Terminal illnesses2. In the event that Darrell was diagnosed with a qualifying illness, he may be able to accelerate all or part of the death benefit and receive an unrestricted cash benefit giving Darrell and Christine the option to assist with their children’s education even in the event that Darrell suffered an illness that made him unable to work.
If you are expecting your first child, congratulations! Here is a childbirth checklist prepared by AIG that might come handy for you.
80 percent of people pay for college with cash flow or drawing down an asset, however, there is an alternative to college savings that could make more sense. Here are the 4 steps process:
Step 1: Collateralize assets by leverage compounding interest
You still have to save the money, but instead of giving all that money to the college, you can collateralize the assets. When you collateralize the assets, you can take advantage of the power of compounding interest.
Step 2: Calculate the Expected Family Contribution (EFC)
This is the amount of money the government says each family should be able to pay per year to educate one child (Assess 25 percent of family income and 6 percent of visible assets).
Step 3: Identify how much you have to pay
This is where the EFC from the parents is added with any other source of income (student loans from need-based financial aid, grants, scholarships, etc.) to meet the expected tuition payments.
Step 4: Find the best and most efficient strategy for college expenses and retirement
You can combine your savings goals into one - use retirement dollars to help pay for college, and use college dollars to help with our retirement.
The preferred tool? Use a whole life insurance policy where loans can be collateralized from the policy to help pay for college, you can see how the numbers work with the policy’s loan summary.
Quick Take: whole life benefits as a college planning tool
If you are interested in using whole life as a 529 alternative, please contact us so we can run illustrations for you, and you can then decide if the numbers make sense for you or not.
Q. What's the rule to use 529 money to pay for high school expenses/
A. While Federal law allows you to withdraw up to $100,000 tax-free from a 529 account each year to pay for tuition for kindergarten through 12th grade, and most states follow the federal law, there are some states have different rules.
Check your state and plan before making the withdrawal, you can go to Collegesavings.org to get links to your state plans.
Q. Which 529 plan is the best?
A. Morningstar Names The Best 529 College Savings Plans For 2018 – Back in 2011, Morningstar launched its Analyst Ratings, which were intended to be a qualitative forward-looking assessment of investment managers (to use in addition to or in lieu of its backward-looking-performance-based Star Ratings), and over the years the Analyst Ratings have been expanded beyond just mutual funds to now include 529 College Savings Plans as well.
In Morningstar's latest evaluation of 62 different 529 plans (representing more than 95% of all 529 plan assets), Morningstar rates less than half of them (27) as achieving at least a Bronze or Silver rating, and only 4 earning the coveted Gold rating: the Utah my529 plan, Virginia529, the Illinois BrightStart plan, and Nevada’s Vanguard 529 plan.
Notably, all four gold-rated plans are direct-sold plans to consumers that don’t necessarily include any advisor compensation (which helps to bring down their fees and likely improved their ratings),
Q. I am considering opening either a 529 plan or a prepaid tuition plan, which is better?
A. 529 plan is better of the two, for the following reasons:
1. Prepaid Plan Only Covers Tuition
Room and board expenses, which could be half of the cost of college, are covered by 529 plan but not Prepaid tuition plan!
2. Prepaid Plan Requires to attend In-state Public School
If your child wants to go to a private or out of state college, it will not be covered by the prepaid plan. Even if you move out of the state and your child decides to go back to the state and attends the public school, he or she will have to pay out of state tuition which there will be a gap to fill.
3. Prepaid Plan Could Stops
At this time, only 16 states still offer prepaid tuition plan, the rest have cancelled their prepaid plans after finding that they couldn't invest the money to keep up with the pace of rising cost of tuition. In most cases, they return the money back with only a small amount of interest.
Q. What's the risk of co-signing a loan, especially college loan?
A. When you co-sign a loan or credit card account, you are liable for any debt incurred.
According to Federal Trade Commission, 75% of all co-signed loans in default are ultimately repaid by the co-signer, not the original borrower. Lenders will act quickly to contact co-signers when payments are late. Delinquencies are also reported on the co-signer's credit report, this put your own financial wellbeing at risk when you co-sign a loan.
Co-signing a college loan has probably the highest risk because government could debit the social security benefits of recipients who co-signed loans. In 2015 alone, $171 million was taken from about 114,000 recipients age 50 or older who had co-signed loans that had been in default for at least one year.
Strategy to consider under the new tax law - Revisit your use of 529 college savings plan
What is Changing?
Under the previous tax law, money from 529 college savings plan could be withdrawn tax-free only to pay college related expenses.
Under the new law, you can withdraw up to $10,000 per child each year tax-free to pay tuition for private or religious school or to pay for expenses related to home schooling.
What to Do?
Start a 529 college savings plan if your child or grandchild is attending or may enroll in a non-public school. Also consider funding a 529 account if you have a disabled child. The new tax law allows you to roll 529 assets into ABLE accounts - tax advantaged savings account for individuals with disabilities.
Q. Does 529 plan cover off-campus living expenses?
A. Yes, as long as the student is a half time student, you can withdraw the amount he or she spends on off-campus rent, up to the room-and-board allowance the college includes in the cost of attendance for federal financial aid purposes.
You can find the amount from the college's website, or ask the financial aid office, and make sure keep the records of the rent paid.
1. Who can establish a 529 plan and how many plans can be established?
You can establish and name anyone as a beneficiary — a relative, a friend or even yourself. There are no income restrictions on you, as the contributor, or the beneficiary. There is also no limit on the number of plans you can establish.
2. How much can you contribute to a 529 plan?
The annual contribution limit for 2017 is $14,000. This limit is per contributor, per beneficiary. For example, a married couple could contribute $28,000 each year to each of their children’s 529 plans. If the couple utilizes the accelerated gift method, they could contribute $140,000 to each of children’s 529 plans and then repeat the process after five years.
3. How frequently can you change investments inside a 529 plan?
You can make changes twice a year. An often-overlooked solution to this limit is available when you change the beneficiary. Upon changing the beneficiary, you reset the investment change limit.
4. Are there taxes on 529 plan withdrawals?
No. Withdrawals of principal (contributions), interest, dividends and capital gains are all tax free is used for higher education. Be sure to match withdrawals with payments of qualifying higher education expenses in the same tax year.
5. What are qualified higher education expenses?
The most common qualified education expenses include: required tuition and fees, room and board, off campus housing (up to the school’s room and board allowance for federal financial aid), required textbooks and computers.
6. What happens if the student does not pursue higher education?
If the student does not pursue a higher education, the 529 can be left intact and continue to grow on a tax free basis for a different student. Change the name of the student before taking withdrawals by changing the beneficiary on the 529 plan
7. When changing the beneficiary, what type of beneficiaries would be classified as a tax free transfer?
The most common tax free transfer beneficiaries are: son, daughter, descendant of son or daughter, stepson or stepdaughter, brother sister, father, mother, stepfather or stepmother, son or daughter of brother or sister, brother or sister of father or mother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law, spouse of any individuals described above, spouse or first cousin.
8. What if the 529 account owner dies before the 529 balance has been withdrawn? You can and should name a successor to your 529 account. In doing so, you can create a multi-generational account exempt from capital gains taxes, income taxes and estate taxes. Since the successor will own the account and can change the beneficiary, choose wisely.
9. What happens if the student receives a scholarship?
The 529 can be left intact and continue to grow on a tax free basis for future higher education expenses (e.g.: business school, law school or medical school) for the same student or for a different student (by changing the beneficiary). You can take withdrawals up to the amount of a scholarship and avoid the 10% penalty on a nonqualified higher education expenses. Note, while you will still pay income taxes on the earnings portion of those withdrawals, your contribution portion (principal) is tax free.
10. What happens if I withdrawal the money from the 529 and do not use it for higher education expenses?
With very few exceptions (i.e.: the beneficiary becoming incapacitated, attending a U.S. Military Academy or receiving a scholarship), non-qualified withdrawals are subject to income taxes and a 10% penalty. Note, income taxes and penalties apply to the earnings portion of those withdrawals. Your contribution portion (principal) is still tax free.
Q. What's the consequence if I co-sign a loan and the borrower defaults?
A. The burden will be on you if you co-sign a loan and borrower defaults, and you can bet that the lenders will aggressively pursue, because ultimately the lenders can garnish your social security benefits.
According to the Federal Trade Commission, 75% of all co-signed loans in default are ultimately repaid by the co-signers, not the original borrowers. Delinquencies are also reported on the co-signers' credit reports.
For example, in an effort to recover millions in unpaid student debts, the federal government sometimes debits the Social Security benefits of recipients who co-signed loans. About $1.1 billion reportedly has been collected this way since 2001. In 2015 alone, $171 million was taken from about 114,000 recipients age 50 or older who had co-signed loans that had been in default for at least a year.
Q. Should I contribute to Roth IRA or 529 for my grandkids?
A. For grandparents who are looking for tax-advantaged ways to help pay for their grandkids' college costs, Roth IRA and 529 have a lot in common - both are after-tax contributions, and both accounts grow tax free. However, they have many differences, some favor Roth IRA and some favor 529:
Roth IRA wins here.
With Roth IRA, you have a lot more flexibility - you can withdraw your contribution tax free whenever you want, and you can take out earnings free of tax and penalties once you turn age 59.5 and as long as you have had a Roth IRA for at least 5 years.
With 529, you will pay income tax and a 10% penalty on any earnings when you withdraw the money for non-educational purposes.
529 wins here.
With Roth IRA, your annual limit is $6,500 a year if you are over age 50, and you need to have earned income to contribute. Also, you have to be within the income threshold.
For 529, you have no income limit and you don't have to work in order to contribute.
529 wins here.
With Roth IRA, there is no tax break for the contribution made to Roth IRA account.
With 529, many states offer tax deductions or credits for at least part of a 529 plan contribution. Also, deposits of up to $14,000 a year ($28,000 for a couple) for each grandchild can qualify for the annual gift-tax exclusion. If you want to reduce the size of your estate, you can deposit 5 years' worth of contributions in a single year without filing a gift-tax return.
Neither Roth IRA nor 529 held by a grandparent is reported as an asset on the student's application for federal financial aid.
But 529 distributions are reported on the following year's application as student income, reducing financial eligibility the next year.
A Roth IRA distribution to pay for college cost will also be considered student income.
Q. If my son open a Roth IRA account for his summer job money, will it affect financial aid for college?
A. No, assets in an IRA, whether held by the student or the parent are excluded from Financial Aid calculation.
However, if your son withdraws money from the IRA, it will be treated as income and included in his Federal Financial Aid calculation form. So do not withdraw money from your child's IRA until after the last tax year that counts for financial aid.
Q. My son is going to attend college next year. Other than the normal expenses I know - tuition, room and board, books, etc, what other expenses should I budget for it?
A. The real cost of college is at least 20% higher than what most parents thought, here are some of the major expenses parents usually forget -
Q. Does 529 cover part-time college expenses?
A. Yes, a student doesn't have to be full time in order to use 529 money to pay for tuition, fees, required books, and supplies.
The student just needs to attend a postsecondary educational institution that is eligible for the student-aid program administered by the U.S. Department of Education.
Q. Could the following plan help my child get college financial aid - still save regularly for my child's college expense (but not through 529 plan), then right before my child goes to college, use that money to pay tax by converting traditional IRA to Roth IRA. After that, we retire early and only live off the Roth IRA income for the college years and show virtually no income.
A. It's a nice plan, but unfortunately it won't work -
Because eligibility for need-based financial aid depends on total income, which includes both adjusted gross income (AGI) and untaxed income and benefits. A tax-free return of contributions from a Roth IRA is counted as untaxed income.
Q. Are student credit cards different from regular credit cards?
A. The answer is not really, unless you think the following differences matter -
A student credit card's APR tends to be higher, all things equal. Also, it will be harder for a student credit card holder to get 0% introductory offer.
A student credit card's credit limit is modest, because a student account holder tends to have no to little income to justify a higher credit limit.
A student credit card's approval criteria are more relaxed - as long as the student is over age 18, has no bad credit, has a social security number, a modest income (e.g. a part-time job) and a bank account, the approval should not be a problem.
Q. What are the in-state tuition requirements by different states?
A. While generally a student must have at least one parent who is a state resident for at least one year before being considered for in-state tuition, the actual residency requirements vary by state.
Instead of searching each individual state's requirements, here is a link where all the 50 states' requirements are put together for each checking.
Q. Wat is the new strategy for grandparent-owned 529 college savings plan with the new financial aid application process?
A. Starting 2016 Fall, the process of applying for financial aid has a major change.
Change of Financial Aid Process
Students and their families will be able to file the Free Application for Federal Student Aid (used to determine financial aid from the government as we ll as from colleges) 3 months earlier, or as early as October 1st. Instead of estimating tax data that has not been filed, families will use past year's filings to report income and assets.
Change of Grandparent-owned 529 Cashing Strategy
This change brings a new strategy for grandparent-owned 529 plans -
Previously, withdrawals from such accounts counted as student income during the first three years of college. Now distributions made during the last 2 years are NOT reported on the FAFSA. So the new strategy is to delay cashing in on the grandparents' 529 accounts until the final 2 college years in order to maximize your chance of getting financial aid.
Q. What are the some arguments against 529?
A. Below are some common arguments against 529 and the counter-arguments.
1. Investment in 529 could loss money in the end.
Since 529 money is mostly invested in the stock markets, there is a chance it could loss money during the time it's invested. (True, but your investment could gain over time. In short, there is no guarantee.)
2. Money in 529 hurts financial aid chances
The more you save in 529, the less your financial aid chances. While other investments, such as Roth IRA, permanent insurance, etc. are excluded from the financial aid formula. (True, but the impact from 529 on financial aid is relatively small, only 5.64%)
3. The fees on 529 plans are outrageously high
The fees on most investment options under 529 plans are very high, and you are stuck with the limited choices. (True, you should shop around and find the best plan investment options, although if you buy from an out of state 529 plan, you will lose your own state's tax benefit, if there is any.)
4. If your child doesn't go to college or drop out, or you saved too much, you are out of luck.
In any of the circumstances, you will have to pay tax on all earnings (if there is any), plus 10% penalty. (If the child doesn't need the 529 money, you can transfer it to another child.)
Q. Should I invest in both Coverdell and 529 for my child's education expenses?
A. If your income falls within the limit, you could invest Coverdell first, which has an annual limit of $2,000 per student. 529 has a much higher limit.
When comparing Coverdell and 529, each has its own pros and cons. Some major ones are below:
For other comparisons, please visit our earlier blog posts on Coverdell and 529, as well as 529 vs. Whole Life as education funds.
Q. Does 529 cover off-campus living expenses?
A. Yes, but with a limit.
Money in 529 accounts can be used to pay for off-campus housing expenses, but only to the amount the school charges for room and board, and the student has to be a half-time or full-time student.
Q. I am a foreign student in the U.S. without established credit history. What's the best credit card for my situation?
A. You can try student credit cards that are specifically designed for college students who don’t yet have a full-time income or established credit history. You can upgrade student credit cards to a regular credit card after a year or two of responsible use.
Below are 3 of the best student credit cards and their perks:
Discover it for Students
Journey Student Rewards from Capital One
Discover it Chrome for Students
Q. My son is going to college this fall. Is there anything I should pay attention to when review the college financial-aid award letter?
A. The college financial-aid award letter usually follows the college acceptance letter, but there are a few common pitfalls parents should try to avoid when reading the letter:
a. First Year Only
The letter you receive is for the first year only, be careful that some colleges front-load scholarships or grants so the financial picture looks attractive for the first year. Each year a new financial-aid aware letter will arrive and the numbers might be different from the first year's figures.
b. Parent Plus Loans
The financial-aid letter might include parent Plus loan offers, be careful it's different from the regular student loans as parental borrowers must pay monthly payments right away and Plus loan carry high interest rate and fee.
c. Net Cost vs. Net Price
Net Cost is the cost after the entire financial-aid package numbers, including loans which is something you have to pay back later; Net Price is a more realistic number if you are looking for your trust college cost - it is your total Cost of Attendance minus free money such as grants, scholarships, and other aids you don't have to pay back!
PFwise's goal is to help ordinary people make wise personal finance decisions.