Debt

Ways to Ease the Cost of College

Presented by Beacon Financial Group

A look at grants, scholarships, 529 plans, and other methods

How much could a college education cost in the 2030s? You may want to take a deep breath and sit down before reading the next paragraph.

A MassMutual analysis projects that four years of tuition, room, and board at a private college will cost nearly $369,000 in 2031. An article at CNBC offers a slightly cheaper estimate, putting the total expense at $303,000 for a freshman setting foot on campus in 2036. (Today, the cost of four years at a private university is less than half that.) How about the price tag for four years of tuition, room, and board at a public university in that year? The same CNBC article says that it may reach $184,000. 1,2

Even today, finding enough money to pay for college can be an enormous challenge. There are obvious ways to counter the cost: a student can work full time and apply much of the income toward school, or assume student loans. Fortunately, there are other ways – ways that you may want to explore if you do not want your child to take a hard-scrabble path through school or get soaked with debt.

Ideally, you use money you never have to repay. Grants and scholarships are more plentiful than many students (and parents) realize, and some go begging for applicants. Grants are based on need; scholarships, on merit. Grants can be issued incrementally or in lump sums to a student; most are awarded on a first-come, first-serve basis, which is why it is so crucial to fill out the Free Application for Federal Student Aid (FAFSA) early. A school accepting your student will evaluate your student’s FAFSA, then send an award letter detailing his or her eligibility for federal and state grants. As for scholarships, there are literally millions of them. Sallie Mae provides a convenient online search tool to explore more than 5 million such awards, and you can use it to drill down to opportunities that are strong possibilities for your student. 3

Through a 529 plan, you can invest to meet future college costs. 529 plans come in two varieties, and both varieties have common tax advantages. 529 plan earnings are exempt from federal income tax, and 529 plan assets may be withdrawn, tax free, so long as the money pays for qualified education expenses. While there are no federal tax breaks linked to 529 plan contributions, more than 30 states offer state income tax deductions or credits for them. 4

Some 529 plans are prepaid tuition plans, giving you the potential to prepay up to 100% of your student’s future tuition at a public university within your state (most of these plans do not pay for housing costs). You may be able to convert a prepaid tuition plan so that the assets can be used to pay tuition at an out-of-state university or private college. (There is also the Private College 529 Plan, which 250+ private colleges and universities collectively support.) 4

The great majority of 529 plans are college savings plans, analogous to Roth IRAs. In a college savings plan, you can direct your contributions into equity investments, which offer you the possibility of tax-advantaged growth and compounding. (If the investments perform badly, your college fund may shrink.) 4

You may choose to fund a 529 plan account incrementally or with a lump sum. States put different limits on the amount of money that a 529 account can hold, but six-figure balances are often permissible. You can invest in any state’s 529 plan and pay for higher education expenses with 529 plan assets at any qualified U.S. college or university. 4,5

Whole life insurance could help. If you have a permanent life insurance policy with some cash value, you could take a loan from (or even cash out) the policy and apply the amount toward college costs. The value of a life insurance policy does not factor into a student’s financial aid calculation (which many parents do not realize). If you take a loan from a life insurance policy, you will reduce the death benefit; repay the loan in full, and you will restore its full value. 6

Some families use Roth IRA assets to pay for college. A Roth IRA gives you a degree of flexibility that a 529 plan does not. Suppose your child does not go to college. (While this may seem highly improbable, some young adults do start successful careers without a college education.) In that event, you still have a Roth IRA: a tax-favored retirement savings account with the potential for tax-free withdrawals. 7

A Roth IRA is not a perfect college savings vehicle, however. First, the annual contribution limit is low compared to a 529 plan. Second, while you may withdraw an amount equal to your contributions without penalty at any time of life, a Roth IRA’s earnings represent taxable income when withdrawn. Third, while Roth IRA assets are not countable assets on the FAFSA, tax-free Roth IRA contributions, once withdrawn, still amount to untaxed income for your student (i.e., the Roth IRA beneficiary), and they lower a student’s eligibility for need-based aid. 7

Going to college should not mean going into debt. Would you like to plan, save, and invest to reduce or avoid that consequence? Then talk with a financial professional who is well versed in college planning. The variety of options available may pleasantly surprise you.

Know someone who could use information like this? Please feel free to send us their contact information via phone or email. (Don’t worry – we’ll request their permission before adding them to our mailing list.)

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - forbes.com/sites/megangorman/2018/08/23/balancing-the-high-cost-of-child-care-and-college-savings [8/23/18]

2 - tinyurl.com/y9on33n6 [6/23/18]

3 - salliemae.com/college-planning/financial-aid/understand-college-grants/ [11/15/18]

4 - savingforcollege.com/intro-to-529s/what-is-a-529-plan [8/29/18]

5 - thebalance.com/529-limits-contributions-balances-taxes-4138359 [9/19/18]

6 - nextavenue.org/life-insurance-pay-childs-college/ [9/18/18]

7 - savingforcollege.com/article/can-a-roth-ira-be-used-to-pay-for-college [8/1/18]

Staying Out of Debt Once You Get Out of Debt

As you reduce your liabilities, embrace the behaviors that may improve your balance sheet

Paying off a major debt produces a sense of relief. You can celebrate a financial milestone;

you can “pay yourself first” to greater degree and direct more money toward your dreams and

your financial future rather than your creditors.

Once you get out of excessive consumer debt, the last thing you want to do is fall right back

in. What steps can you take to reduce that possibility, and what missteps should you avoid

making?

Step one: save money. So often, an unexpected event can put you in debt: an auto

breakdown, a job loss, a trip to the emergency room or a hospital stay. If you earmark $50 or

$100 a month (or even $20 a month) for an emergency fund, you can create a pool of money

that may help you deal with the financial impact of such crises. Every dollar you save for these

events is a dollar you do not have to borrow through a credit card or a personal loan at

burdensome interest rates.

Step two: budget. Think about a 50/30/20 household budget: you assign half of your income

for essentials like housing payments and food, 30% to discretionary purchases like shopping,

eating out, and entertainment, and 20% to savings and/or paying down whatever minor debts

you must incur from month to month.

Step three: buy things with an eye on value. Do you really need a new car that will require

financing, one that will rapidly depreciate as soon as you drive it off the lot? A late-model used

car might be a much better purchase. Similarly, could you save money by eating in more often

or bringing a lunch to work? You could find some very nice goods at very cheap prices by

shopping at thrift stores or online used marketplaces. These are all smart consumer steps, net

positives for your financial picture.

You should also be aware of some potential missteps that could lead you right back into

significant debt, or negatively impact your credit rating. Some of them may be taken

consciously, others unconsciously.

Misstep one: spending freely once you are free of debt. If you get rid of consumer debt, but

retain the spending mentality that drove you into it, your financial progress may be short-lived.

If the experience of getting into (and getting out of) debt does not change that mindset, then

you risk racking up serious debt again.

Misstep two: living without adequate health, auto, or disability insurance. Sometimes

people are forced to assume large debts as a direct consequence of being uninsured.

Hopefully, you have not been one of them. If you must pay for your own insurance and the

premiums seem high, remember that they will likely be lower than the bills you could be forced

to pay out of pocket without such coverage.

Misstep three: getting rid of the credit cards you used to go into debt. You may think this

is a great way to quickly improve your credit rating. It may not be. Closing out credit cards

reduces the amount of credit you can potentially draw on per month, which hurts your credit

utilization ratio. Having more accounts open (rather than less) improves that ratio.1

The key is how you use the accounts in the future. When you use about 10% of your available

credit each month, that is a positive for your credit score. When you use more than 30%, you

potentially harm your score. For the record, the length of your credit history accounts for

about 15% of your FICO score, so if a card has more good payment history than bad, getting

rid of it could be a slight negative.1

Instead of closing these accounts, keep them open, and use the cards once a month or less.

Should a card charge you an annual fee, see if you can downgrade to a card from the same

issuer that does not.

If you can keep debt reined in, you will have an opportunity to make financial strides. Not

everyone has such a chance due to the weight of their liabilities. Earlier this year, total U.S.

credit card debt alone surpassed $815 billion.2

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This

information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee

of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is

advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and

may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment

or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular

investment.

Citations.

1 - cnbc.com/2018/01/19/why-you-should-keep-old-credit-card-accounts-open.html [1/19/18]

2 - usatoday.com/story/money/personalfinance/2018/08/15/simple-things-anyone-can-do-stay-out-debt/989168002/ [8/15/18]