Education is the great equalizer, and there’s perhaps no better (or bigger) expense to plan for when raising children. According to College Board’s Trends in College Pricing and Student Aid 2021-2022 survey, the average annual tuition for an in-state student at a public college was $10,750, and the cost for tuition at a private college was $38,070 per year.1 Room and board, fees, books, meal plans, and miscellaneous costs are extra.
While those numbers may seem daunting, with smart strategizing, your family can be well-positioned to tackle the costs of higher education. Let’s examine how two hypothetical families in different situations faced the options for saving enough to educate their kids.
Before their baby even arrived, Maggie and husband Brian began thinking about how to pay for college. With 18 years to save, time is on their side. Still, they aren’t sure where to begin.
Brian and Maggie are considering opening a 529 Plan for their child. These plans are tax-advantaged education savings funds that allow contributions of after-tax dollars to grow tax deferred and be withdrawn tax free as long as the funds are put toward qualified educational expenses. Often, the accounts are age based, allowing for more aggressive portfolio management in the early years and more conservative management as the child gets closer to college. Also, if your child goes to private primary school, up to $10,000 can be used annually to pay for K-12 tuition. If, however, 529 Plan money is withdrawn and used for anything other than qualified education funding, taxes and penalties will apply.
Since there is no expiration date for a 529 Plan, Brian and Maggie could potentially tap into the funds for any of their future children, themselves, or another beneficiary. Plus, since the Secure 2.0 Act became law in December 2022, 529 Plans held for at least 15 years can rollover up to $35,000 into a Roth IRA in the same name as the 529 beneficiary.2 A financial professional can explain all the ways 529s can be used as part of a comprehensive financial strategy to meet both educational expenses and retirement planning.
Unlike a 529 Plan intended primarily for qualified educational expenses, a mutual fund can help Brian and Maggie grow funds for any number of uses. However, mutual funds can lose value, too. Despite the enticing flexibility, Brian and Maggie will have to carefully weigh the potential growth benefits against the risk of loss as well as the capital gains tax cost of withdrawing money from their investments.
With a child on the way, Brian and Maggie should reexamine their life insurance needs. They might consider converting their 15-year term policy into a whole life product that offers both insurance protection and a way to accumulate cash value. A financial professional can help them evaluate how much coverage they need, what the premium costs would be, and how the policy’s cash value account can grow and be withdrawn over time3.
Used together, a 529 plan, mutual fund investment account, and cash-value-accumulating insurance product could help Brian and Maggie protect their family while also preparing for the future costs of education.
After being married for a decade and devoting themselves to their careers, Alice and Anna decide to expand their family by adopting a 10-year-old daughter. They were able to afford all the costs of adoption and have plenty of room in their home and hearts for Hannah, but they are concerned they’re behind on saving for her college education.
Fortunately, Alice and Anna already have a whole life insurance policy that has accumulated a significant amount of cash value and continues to grow. Since they have just eight years to save for Hannah’s schooling, they should discuss with their financial professional if they might be able to use some of their policy’s accumulated cash value to meet future tuition costs.
Additionally, they can direct money into mutual funds and investment accounts, properly considering their risk tolerance and time horizon, so the funds are accessible whether Hannah decides to attend a two- or four-year college, trade school, or do something else entirely like starting her own business.
Alice and Anna can open a 529 Plan for Hannah and begin making contributions that will grow tax deferred. While Brian and Maggie had 18 years to contribute to their child’s 529 plan, Alice and Anna only have eight. That also means they will have to account for 10 fewer years of accumulation and returns, which for a 529 Plan can be around 5-6% annually. For Brian and Maggie, a monthly contribution of $250 will grow to almost $85,000 by the time their child is 18 years old. Alice and Anna would have to contribute up to $750 monthly to reach the same amount by the time Hanna reaches 18.4
If Hannah decides not to attend college but still wants to use the money, it will be subjected to taxes and penalties. By the time Hannah decides whether or not college is for her, the 529 Plan will have been open for fewer than 15 years, meaning those funds cannot be rolled over into a Roth IRA in her name, for another seven years. Alice and Anna need to decide how much flexibility they want and need for the money they set aside for Hannah.
When saving for a big-ticket item like college, consistency is key. Even if you can only set aside a small amount, the savings will be worthwhile over time. As you earn more, save more. Make it a non-negotiable habit. It all adds up, and time helps.
That said, don’t panic if you get a late start. You may have to make larger contributions than if you had started saving earlier, but with education costs continuing to rise, the more you can put away, the better.
Self-funding college isn’t the only option of course. Public colleges can offer a great education at more affordable in-state prices. Many private universities also have large endowments, offer merit-based and need-based aid, and can help incoming students identify scholarships and grants. Remember, there are loans for college, but none for retirement.
When strategizing how to fund your child’s education, be sure to consult with your financial professional who can help you take a complete picture of your situation and work with you to build a strategy that works for you, your family, and your timeline.
1“Trends in College Pricing and Student Aid 2021-2022,” College Board, October 2022
2 “529 Plan Rollover to a Roth IRA,” Forbes, April 12, 2023
3You can access the cash value in your policy, generally tax free, via partial surrenders and policy loans. Policy loans and surrenders reduce the policy’s available cash surrender value and death benefit. Loans also accrue interest.
4“Compound Interest Calculator,” U.S. Securities and Exchange Comission, accessed September 25, 2023. Calculated with monthly contributions and an assumed 5% annual return for the duration of investment
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
SMRU #6006191 exp. 11/1/2025