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Saving For College

What Does Debt Elimination and College Funding Have in Common?

I thought about this a lot before deciding to add it to my website. I didn’t want to sidetrack anyone from getting out of debt. But the two go hand in hand.

One of the biggest obstacles to staying out of debt for families is financing the cost of a college education. I’ve met with hundreds of families in the past 20 years. Paying for college is huge for the average family. Parents just want to make sure their children get through college, and are willing to make whatever financial sacrifices possible to accomplish that goal.

These sacrifices often entail cutting back on saving for retirement, or stopping altogether. I emphasize they must make sure their retirement is adequately funded before going to the poor house for college funding. But I’ve come to learn that’s not happening. College for the kids comes first. Some families borrow against a 401K. Not the best idea. Funding can drain bank accounts and brokerage accounts. It may require living on an extremely tight budget for years on end. That can cause a tremendous strain on a family. And of course, families many times go into debt for years with various loan programs to pay for college. Do you really want your child to graduate college with massive debt?

So What Are My Options?

Families save for college various ways. There’s the Coverdale Education IRA, as well as 529 plans and custodial accounts, to name a few. They all have advantages and disadvantages. You must remember that any money left in a child’s custodial account once that child reaches the age of responsibility, usually 21, belongs to the child. Actually, once you put any money in a custodial account, it belongs to the child with you as the custodian. So if the child doesn’t finish college, and turns 21, you have to let him/her have the money. That may not be the best thing, but I’ve seen it happen. And the money in a custodial account counts against the child for college loans and grants.

The popular 529 plan also has its draw backs.

  1. The money in a 529 plan counts against student eligibility for financial aid.
  2. There are tax consequences if not used for qualified expenses.
  3. The plans charge administrative fees and investment expenses that can significantly reduce the growth of your money. And for the most part, registered representatives are paid a commission when they are sold. You need to shop the market for the lowest fee 529 plans.
  4. Your money is at risk in the market.

RED ALERT 2015: This just in….President Obama has proposed taxing 529 plans as part of his new round of tax increases! Read the USA report HERE.

Let me go into a little more detail on the above statements. When a student applies for aid, money in the 529 plan can reduce the student’s eligibility for aid by 5.64%. Here’s an example. Say a parent owns a 529 plan for a child, and it has an account value of $30,000. Now you must calculate 5.64% of that, which is $1,692. That amount is subtracted from any aid the student would have received for that year. You have to redo the calculation each year of college.

Tax consequences: If your child never attends college or drops out, you’re stuck with that money unless you have another child to transfer it to. Any unused portion of a 529 plan loses its tax exempt status in the future. So not only will you pay taxes on the gain in the plan, but a 10% penalty when you withdraw the money.

saving for collegeCosts and your money at risk….so the 529’s value will go up and down with the market. While that may not be a bad thing at the start, the closer you get to college, the more closely you have to watch it. Many plans will manage the money for you and automatically lower your risk as your child approaches college age. But if the market is hot the two years before college begins, and your 529 plan is conservative, it will cost you earnings that could have significantly added to the account value. Of course, in 2008 they all went down regardless.

That’s just the way it is. You can’t have your cake and eat it too. The more money management involved, generally the more internal costs. You have to be wise when shopping around for the plan, and don’t just buy the one your representative wants to sell you. Remember, those fees come out even when your account value is flat or has gone down.

One caveat…the 529 plans are good only for schools in the US and only for “qualified expenses”. Buying your child a car doesn’t qualify. Go HERE to learn more about 529 plans.

The Infinite Banking Concept as The Alternative

What are the advantages of using the Infinite Banking Concept to save for, and pay for college? You save and use the money without ever having to pay taxes. You never have to worry about losing money in the market…no market risk. There are no limits on how you can use the money. And the money in your Infinite Bank will not count against the financial eligibility of your child on the FAFSA form. You could have $200,000 in your Infinite Bank and it will not have to be reported on that FAFSA form. Pretty cool.

But even beyond all that, the real value of the Infinite Banking Concept for college funding is not putting the burden of debt on your student after college. Your private family bank can provide the lending you need to cover the cost of college. You pay back your bank on your schedule. Paying back college loans to your private family bank with interest actually builds wealth in your bank. So when all the college is paid for, you’re actually more wealthy instead of in the poor house! And you’ve increased your future retirement income during that time, income that will some day pay you tax free for life. You can even have your child pay back the loan. So instead of some other bank making the profit on your child’s college loans, you do! If you’ve educated your child on Infinite Banking, you can give him/her the bank. Then she/he can repay the loan with interest, create wealth for the future, and never have to worry about bank loans.

Call me or email me TODAY and let’s discuss how you can start using the Infinite Banking Concept for your child’s future.