The typical family pays for college with six funding resources: 34% grants & scholarships, 29% Parent Income & Savings, 13% Student Borrowing, 12% Student Income & Savings, 7% Parent Borrowing and 5% Relatives & Friends. 1Historically, there is quite an inventory of savings vehicles: UGMA/UTMA, Grants, Scholarships, Work Study, Education Savings Bonds (Series I or EE), Coverdell IRAs, Post 911 GI Bill & ROTC, Section 529 Plans, Cash Value Life Insurance and Real Estate Equity.
Sometimes tax management can come into play and free up money otherwise going to Uncle Sam. Knowing how to position and purchase investments on the basis of taxes can create greater cash flow, freeing up more money for college.
Home equity is a resource, but not a free resource unless you’re age 62 or older. Some Baby Boomer parents had their children late in life. Traditional HELOC equity loans demand interest payments, the loan could be called and the equity line of credit has no earning power. But a HECM (Home Equity Conversation Mortgage) loan appreciates annually for any unused portion of the equity line and increases uncorrelated to its market home value. Borrowers pay no out of pocket interest payments and are not required to payoff the loan.
You could borrow from your 401(k) retirement plan. You need to prove your need is imminent or immediate, not for repayment of a student loan, but for the upcoming year. Borrowing from your 401(k) plan is not free, reasonable interest will be assessed. Often plans have their own withdrawal rules for pre age 59½ access for plan participants. Some plans don’t allow ongoing contributions while an outstanding loan is on the books. The plan participant is losing out on the tax-deferred growth of the plan’s investments. Some plans have payment schedules that require payments and will treat late and unpaid payments as a taxable withdrawal with a 10% penalty before age 59½.
You could borrow from your cash value life insurance, if the policy is a non-modified endowment contract and the contract is kept in force for the life of the policy insured. There are no taxes on the gains via policy loans. There are a variety of cash value policies to fit your risk profile and suitability requirements. So keep these funding options in mind as you work with your financial adviser to craft a college plan that supports your family’s goals. It’s your life. It’s your time. It’s your money.
1 Source: Sallie Mae, How America Pays for College 2016