As it stands today, the average salary for nongovernment-employed middle-class Americans is decreasing, while the average tuition for college is increasing. For example, the state of California is planning to double tuition fees for their state colleges. With the rapidly increasing rate of tuition, most middle-class families will not be able to send their children to college without jeopardizing their own personal retirement or leaving their children in debt upon graduation. On top of it all, students need to be able to pay all of their bills including food, clothes, travel, electricity, gas, phone, and wifi bills, and often renters insurance on top of their rent. You can look at the reviews for somewhere like roost renters insurance to find the best deal compared to other insurance companies, but it is often underestimated how much it truly costs for a student to study at college.
One of the major problems facing the U.S. higher education system is that many of the best students are not going to the top-tier universities they should be because they cannot afford the high tuition costs and they do not want to endure mortgage-like debt before they enter the workforce. Many educational analysts believe this to be one of the leading reasons the United States ranks so poorly in higher education among industrialized nations.
With gas prices nearing five dollars a gallon and the unemployment rate still more than 9 percent, the fact that many parents are having a difficult time allocating and saving money for their children’s college fund should come as no surprise. More often than not college planning has taken a sideline to keeping the lights on and food on the table.
Another disappointing situation I often witness is when parents have saved money for their children to go to college and that little bit of extra savings prevents the student from receiving government financial aid or grants. Traditional college savings accounts like 529 plans (or, as I like to call them, 229 plans, because they are lucky to have earned at least 2.29 percent return over the past 10 years) are counted in the student’s expected family contribution (EFC) score.
In most circumstances if the parents have more than $40,000 in non-retirement liquid investment accounts, their EFC score will be too high and disqualify the student from any government assistance. Having previously worked in the community college sector, I have witnessed far too many students unable to attend top-tier universities because they lacked funds and guidance. Many of those students end up taking classes at a community college and quite often they can’t afford to transfer or graduate.
When I take community college students to visit universities, I am always amazed to see the type of students that are currently attending. To be honest, our universities are starting to resemble our Congress: 95 percent are from wealthy, upper-class families and the other 5 percent are from middle or working class backgrounds.
Our universities were originally designed to attract the brightest and hardest-working students and to prepare them to be the leaders of tomorrow. Instead, our universities resemble more of an “old boys club” rather than a place of higher education. That is the reason I have such a great passion for college planning and for helping students get into the schools they never thought they had the ability to attend.
While the theory of college planning is not new, the strategy of using life insurance is an innovative approach.
According to the FAFSA (Free Application for Federal Student Aid), “investments” do not include a primary residence, life insurance, retirement plans, pension funds, annuities and non-education IRA accounts –which means they cannot be counted in the EFC equation. Almost all students under 24 years of age, regardless of their tax-filing status, are required to complete a FAFSA form with their parents’ current financial information in order to determine eligibility for government financial aid or scholarships.
When designing a college plan, the goal is to lower the EFC score so that a student can be eligible for government financial aid. This can be accomplished by using one of the best financial products available-life insurance.
In most circumstances, the parents will have a lump sum of money sitting in a brokerage account that has been allocated for their children’s college fund. What many parents don’t realize (most likely because they simply have never been informed) is that their brokerage account is subject to market loss, disqualifies the student from most financial aid and, at the current tuition increase, is not nearly enough to pay the college attendance fees for eight or more semesters.
Depending on when clients need money for college, a better approach is to use a combination of single premium immediate annuities, indexed universal life insurance and/or indexed annuities. Some college planners prefer to fund a whole life policy as a modified endowment contract (MEC), taking withdrawals to help pay for college. The problem with this approach is that all future gains in MEC policies are taxable and subject to IRS penalties if the clients are under age 591/2, which limits the ability of such plans to provide future tax-favored access to the cash values.
The preferred approach is to design a college plan, (which includes all payments like Bloomsburg student housing bills, food, clothing, travel, and other miscellaneous expenses) so that the parents can continue to fund the life insurance policy in order to build up substantial cash values for the future. When designing a plan for multiple students where there is a need for income in the next semester or sooner, a single premium immediate annuity can be used to help cover the pending college fees as well as fund an indexed universal life policy. By continuing to make contributions to such a policy, funds will grow tax-free and be available for other children to go to college as well as for retirement savings accounts for the parents.
College planners can come up with some amazing results after lowering a student’s EFC score. In most circumstances students are able to get grants and scholarships that would never have been available to them otherwise. At the end of the day, I love knowing that by showing clients a college planning approach, I am changing their lives for the better-and I am proud to say we use life insurance to accomplish such a meaningful goal.
Assisting another person with their future is of immeasurable value, and I feel thankful for the opportunity.
