College Funding: Affording Higher Education


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Costs for higher education continue to grow at a rapid rate. Putting enough money aside for children’s or grandchildren’s college tuition is a challenge that requires some strategy. This presentation examines some popular options available today. Let’s get started.

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  • Costs for higher education continue to grow at a rapid rate. Putting enough money aside for children’s or grandchildren’s college tuition is a challenge that requires some strategy. This presentation examines some popular options available today. Let’s get started.
  • First read these important disclosures.
  • First, let’s determine the outlay necessary for approximately 4 years of higher education in the next few years. According to data currently available, tuition, room and board at many private institutions in the United States are now exceeding $50,000 on average. For state universities, tuition, room and board range from $16,000 to about $19,000 for state residents, and higher for out-of-state applicants.The bottom line is that 4 years of college within this decade could result in costs (and a portion of that debt) for the graduate totaling over a quarter of a million dollars. And it doesn’t appear that these costs will decline. Let’s look at a projection into the next decade.
  • All predictors indicate that college costs have risen rapidly and will continue to increase. And there is also a trend among recent grads to continue studies into more specializations; not only for medicine and law. This trend can tack on several more years of tuition costs.
  • Surveys also show that a major portion of college funding is provided by parents, with some help from relatives. So the sooner a college fund is started, the better. The question is, what type of funding instrument will provide the growth, flexibility, and tax advantages needed over a period of time?
  • Named for Section 529 of the Internal Revenue Code, a 529 Plan is an educational savings plan established to help families set aside money for future college costs. While providing some tax relief, planning can be cumbersome and the restrictions limiting.UGMA or UTMA accounts translate as Uniform Gift to Minors Act or the Uniform Transfers to Minors Act, referring to a financial account established to hold assets for a minor. Investing through this type of instrument offers a tax benefit over investing in an adult’s name. However, there may be strict rules on how the money may be used and at what age it must be turned over to the child. Additionally, if there are underlying funds, there is a natural exposure to market anomalies, so fund growth may not be adequate for college funding purposes.A Coverdell IRA, or Educational Savings Plan, has many similarities to the 529 Plans, as well as sometimes complicated restrictions. Tax advantages, yes. Limitations, also.So where can you put money aside that offers an easier solution? A bank savings account is simple to establish and will offer a safe harbor – and very low prospects for accumulating a significant sum. Back to the first choice – the 529 Plan is one of the most popular instruments used in saving for college today, but consider this --
  • Life happens when you’re making plans, so if you’ve established a 529 Plan and the child doesn’t want to attend college, or sets his sights on Oxford, what happens to the money? Do you have another child?Risk tolerance should also be considered – if the market is not performing or the volatility we have experienced since 2008 continues for a longer period of time, will a 529 Plan provide the solution to the problem?Or, what if funding is suddenly discontinued due to a death or disability?Let’s take a look at the uncommon choice for college funding – whole life insurance.
  • [Note to Presenter - Just to be clear – when talking about insuring the child and not the parent other than through combined waiver –- Please note that there are key considerations when putting life insurance on a child, including suitability, amount, ownership etc. - Private colleges do not rely solely on FAFSA. If you ask several financial aid offices, many will say that they will look beyond - including what they would consider "excessive" cash values, qualified retirement plan account balances or home equity. These offices can be attuned to people trying to put money into what normally would not be looked at on federal forms.]Whole life also offers minimum guarantees for growth, which occurs on a tax-deferred basis.Policy values can be withdrawn or borrowed at any time, for any reason, and the policyowner determines when and if the loan is repaid. Values may include dividends which are not guaranteed but declared annually by a company’s Board of Directors.As we previously mentioned, annual policy growth has minimum built-in guarantees, is tax-deferred, and is not impacted by sudden changes in the stock market.Plus, by paying the first premium on an approved contract immediately ensures that, in the event of imminent untimely death, the death benefit is paid to beneficiaries – usually free of income tax. As long as premiums are paid and the contract is in force, whole life insurance provides a guaranteed death benefit for the insured’s lifetime.
  • If the policy is purchased with a Waiver of Premium rider, the policy will continue to provide death benefit protection, cash values will continue to grow, and dividends will continue to be paid in case you become disabled. What other funding plan is self-completing?
  • Other advantages to whole life insurance is that policy values may not be considered for inclusion as an asset on a federal college financial aid application (although some colleges use alternative disclosure forms which do ask for cash value).The policy will provide the child with lifetime benefits, whether or not it is used for college. For example – what does a wedding cost? What about seed capital for a small business start-up? Or a down payment on a home?One of the best advantages to many people’s minds is that life insurance is relatively easy to buy and monitor, and it can easily be integrated with an overall financial plan.
  • A variety of products are available, each designed and priced to fit an individual’s needs and budget. Companies may offer a few whole life products, each designed to perform in a slightly different way to meet the policyowner’s desire to have a fully paid-up policy in a shorter period of time, or to grow cash values rapidly, or to pay less over a longer period and maximize death benefit.Riders and options enable the policyowner to secure coverage in case of disability , or to guarantee the ability to purchase additional insurance at various times in the future regardless of changes in health, or to be able to make additional contributions to the policy when convenient in order to enhance benefits.
  • To summarize, there are 5 key reasons to give the gift of life insurance for college funding, and beyond.First – If appropriate for your situation, gifting life insurance allows you to transfer assets and provide a loved one with a significant legacy while reducing the size of your estate.Second – if you retain ownership in the policy, it affords you some control over how the living benefits are directed in your lifetime. It’s an opportunity to work with a young person to convey your values, and start good savings habits.Third – when the policy is on the child it can be designed to help a young person lock in insurability in case of later health issues (instead of when the policy is on the parents or grandparents). Please note that there are key considerations when putting life insurance on a child, including suitability, amount, ownership etc.Fourth – don’t worry – the policy will continue without you event of an untimely disability, through Waiver of Premium.Fifth – the tax advantages are too valuable to overlook, providing you with considerable tax savings.Regardless of “how” you need to be prepared to meet the higher education tuition costs when the time comes. Remember, Life insurance can be used as an alternative to a 529 Plan and can also be used in conjunction with one. And since the life policy has multiple uses, it can help you fund other long-term financial goals, such as retirement. The age of the child you are saving for will help drive how you use various financial instruments. Lets talk today about what is appropriate for your situation!
  • College Funding: Affording Higher Education

    1. 1. Affording Higher Education College Funding 101 The Guardian Life Insurance Company of America, New York, NY 10004-4025 Pub5733 2012 - 7988
    2. 2. Important Disclosure – Please Read Please note that the information in this presentation is not directly related to products sold by The Guardian Life Insurance Company of America. This is general information provided for educational purposes only. This presentation should never be used as a sales tool for replacement of any life insurance policy. The Guardian Life Insurance Company of America, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax and legal advisor regarding your own financial situation. Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors. Please note that policy benefits are reduced through withdrawals, loans, and loan interest.
    3. 3. 2012- 2013 College Costs • Private colleges and universities – $35,000 to $60,000 annually • State universities –$16,000 - $19,000 for state residents; $20,000 - $32,000 for non-state residents annually • Add on fees, books, clothing, etc. Costs x 4 years = +/- $250,000
    4. 4. Rising Trend for College Costs College Costs Enrolled in 2010 Enrolled in 2028 (projected)* 4 Years of Tuition Private College $119,400 $340,800 4 Years of Tuition Public University (in state) $33,300 $95,000 • College costs will continue to rise. • In the past 10 years, the average inflation-adjusted cost of tuition and fees has risen by 28% at private four year colleges and just under 50% at four-year public colleges.** *Based on average tuition and fees for 2010-2011 as reported by The College Board® and assumed to increase 6% annually. **Trends in College Pricing 2009, The College Board®.
    5. 5. How Some Pay Today “How America Pays for College” – Sally Mae and Gallup. New York Times article by Catherine Rampell – July 2010
    6. 6. Common Choices for College Funding • 529 Plans – Advantages: Tax deferred growth; tax free access – Disadvantages: Market volatility, must be used for a U.S. college for tax benefits • UGMA/UTMA – Advantages: Upside market potential; variety of investment options – Disadvantages: Market volatility; limited tax advantages • Coverdell ESA – Advantages: State tax deductions; tax-deferred growth – Disadvantages: Restrictions on amount of contribution and income. • Savings Account – Advantages: Secure, stable -- Disadvantages: No tax advantages; low return
    7. 7. Key Considerations • What if the child doesn’t attend college, or go to one in the U.S.? • What if the market doesn’t turn around quickly enough? • What if the individual funding the plan dies or becomes disabled? Consider Life insurance
    8. 8. The Uncommon Choice: Whole life insurance • • • • Immediate asset protection Tax free death benefit Tax-deferred growth Tax-advantaged access to policy loans • Wealth accumulation not connected to market activity
    9. 9. What Else? • Death and Disability protection – pays a guaranteed death benefit in case of death; self-completing with Waiver of Premium rider (available at extra cost).
    10. 10. There’s More • Potentially not considered for federal college financial aid (although some colleges use alternative disclosure forms) • Lifetime of benefits, whether or not the child attends college • Simple to implement and monitor
    11. 11. Products Designed for Flexibility • Whole life insurance – Full Pay – Limited Pay • Riders and Options -- Waiver of Premium -- Guaranteed Insurability -- Paid Up Additions
    12. 12. Five Reasons to Give the Gift of Life Insurance 1. Legacy – provides a significant legacy for future generations while reducing the size of your estate 2. Control – the policyowner controls the asset, so use can be properly directed 3. Insurability – when the policy is on the child, it can lock in future insurability 4. Self-completing – will continue to build in value and stay in force in case of disability 5. Tax-advantaged – offers tax-deferred growth, income taxfree death benefit, and access to living benefits.