College tuition costs keep increasing on a yearly basis with no apparent end in sight. Including tuition, fees, room and board, the average cost at private colleges nearing $30,000 per year (Source: Trends in College Pricing -2006 , The College Board). With this in mind, the projected cost of educating today's newborn is staggering.
Consequently, whether you are considering a public or private college for your child, it is essential that your planning begin as early as possible. Many parents procrastinate because they feel the task is overwhelming, or they think that saving the required amount of money will force them to severely compromise their current lifestyle. While both of these concerns are legitimate, they need not stand in the way of establishing - and maintaining - an effective college funding plan.
The starting point for developing a plan is to understand the available funding options. Let's take a look at some of them:
Scholarships. While certainly desirable, there is no way to predict whether your child will qualify for a scholarship. Counting on getting a scholarship is similar to counting on winning a lottery—there are far more nonqualifiers than winners.
Financial Aid. Usually in the form of loans, aid rarely covers total college costs. Even if you qualify on a "needs" basis, there is no assurance that the college of your choice will be able to help all those in need.
Personal Income. Procrastinators generally expect to fund college expenses from current income. Would you be able to pay the current cost for one year out of your present personal income?
Personal Loans. While generally available, they could prove costly over the long run when total interest charges are considered.
Savings. This is the one funding option over which you have complete control. While it may not be easy for a young family to save, even small amounts can grow substantially through the effects of time and compounding. The longer you wait, the more difficult it may be to reach your funding goal.
Because of the uncertainty surrounding all funding options except savings, it is critical to make personal savings the cornerstone of your college funding program. However, even a well-conceived savings plan is vulnerable. Should you die prematurely, your savings plan could come to an abrupt end.
To protect against this unexpected event, life insurance is the only vehicle that can help assure the completion of a funding plan. In addition to the protection aspect of insurance, the tax-deferred buildup of cash values can be part of your college savings plan. Generally, distributions up to the contract's cost basis are tax free. Moreover, loans in excess of the cost basis are also tax free as long as the policy remains in force.
Also of particular importance, life insurance cash values are excluded in the needs analysis formula for financial aid used by government agencies and most schools. This means you can build an asset without being penalized if applying for financial aid.
All of the potential sources should be considered when developing a college funding program. However, a regular savings plan, along with life insurance, may be the best way to assure your child will have the means to attend college should something happen to you. Let time be your ally by starting your program now!
Consider the Issues
NPC can help you plan for the rising cost of education with our mutual funds, 529 plans and other products.