Overcoming the Cost of College

The cost of college is rapidly growing.  According to Forbes, the “price of college is increasing almost 8 times faster than wages.”[i] And to make matters worse, educational loans have become the largest block of debt, behind housing, that exists in American today.

Statistics gathered by the College Board,[ii] show that the average debt assumed while paying for a 4-year degree in the United States is $33,480 for private schools, $9,650 for in-state residents and $24,930 for out-of-state residents.  These prices represent a 2.6% annual increase in the cost of education since the late 1980’s.  And yet, according to the Federal Reserve Bank of St. Louis, wages have only increased by 0.3%.  That’s a huge difference!

So, how do you overcome the cost of college?

And the answer to that question is, “Plan carefully.”

Planning, on the parents’ part, is essential if you want to overcome the cost of college.  In fact, it could even save your retirement if you plan wisely. That is because, according to Jennifer Ailshire, University of Southern California,[iii] parents are sharing their children’s student loan debt at a shockingly high rate.

Ailshire’s research is validated by data collected by the U.S. Department of Education. As of 2016, 3.3 million Americans had borrowed $74.5 billion in “Parent PLUS” loans for their children’s education.  Another issue is that the interest rate is significantly higher on Parent PLUS loans compared to subsidized and unsubsidized direct loans.[iv]

Obviously, if a parent is strapped paying back a student loan for their child or children, even if it isn’t at a higher rate of interest than others options, it makes it difficult or even impossible to save as much for their own retirement and future sustainability.  Let’s consider a different option.

Suppose you start saving today for your child or children’s education at age 25 or 30, instead of waiting until you are 35 or 40 when your child is almost ready to start college.  Doing so will allow you to have a resource to draw from if your child needs parental assistance for their college expenses.

But knowing where to save is even more important than knowing how much you need to save. Otherwise, overcoming the cost of college becomes much more difficult and maybe even impossible.

So, in order to overcome the cost of college, you have to realize that paying (saving) more today allows you to keep more tomorrow.  Even so, saving more today can be troublesome if you can’t afford to save more or if it becomes way too uncomfortable for you. That is why you need to start out with something that is both affordable and comfortable.

Let’s look at a simple figure of $56 a week. This amount is 3.8% of the average annual household of $75,000.[v] This $56, by the way, is less than ½ of what the average American has left over from their income after all expenses and cost of entertainment have been spent for the month.

Now if that $56 a week can compound for you at 4% over the next 15-years, you will have $58,309. And $58,309 can easily cover the cost of an in-state college four-year degree at $9,650 a year.

But wait minute.

You want to overcome the cost of college, not just dish out the money to pay for your child’s college education! And in order to accomplish that, you will need the right place to keep your $56 every week.

By taking that $56 dollar a week and purchasing a participating whole life insurance policy (PWLIP) on your own life, you ensure from day one that your child’s education will be paid for in case you die suddenly and unexpectedly.  And if you don’t die, then by the time your child is ready for college, let’s say 15-years from your initial $56 premium payment, you will have $52,876 in the PWLIP that can be used to pay your child’s educational costs to the same in-state college as mentioned above.

From here on out, things get even more interesting.  Suppose you only pay the interest on that PWLIP loan until you retire.  An interest rate of 5% annually on a $38,600 student loan ($9,650 x 4) still would allow $175,304 of tax free cash value to accumulate inside your PLWLIP for you to use in your retirement at age 67. And after that?  Well, after that the cash value would grow annually by at least $7,405 for the rest of your life. That’s not peanuts to laugh at, that’s real tax-free money for you to use.

However, if you also give your child a real education by helping them to understand the value of them paying you back for the student loan you provided out of your PWLIP, things get even better.  By paying back the PWLIP loan at a 7.55% annual rate (a rate not much less than what they would face on any other student loan,) things start looking pretty nifty.

Over the course of the next 20 years your PWLIP loan will be paid off, AND if you stop right there and never pay another penny into the PWLIP, then you will have $305,009 of cash value to use tax-free in your retirement. Plus, your cash value will grow by at least $12,883 annually for the rest of your life without you ever having to pay another dime in premium, taxes or interest costs.

Obviously, using a PWLIP to save for your child’s education is unique in that, first of all, nobody else is talking about it.  But that shouldn’t matter to you.  You can either plan to recover the cost of college for your child or not.  It is up to you. But no other method can guarantee, after one $56 installment, that the money will be there for your child’s educational cost whether you’re there or not.  And if you are there, well, it just gets better after that.

One last thing you need to know about overcoming the cost of college.  Suppose you live to the ripe old age of 90.  You’ve been able to use over a half- million dollars of tax free money due to this policy and you still leave over $300,000 tax-free to your child or grandchildren.  $300,000 is 7.77 times more money than your child’s college costs.  Not a bad return.  They’ve used their 4-year college degree to earn more during their lifetime and now they get it all back, multiplied by 7.77.

[i] https://www.forbes.com/sites/camilomaldonado/2018/07/24/price-of-college-increasing-almost-8-times-faster-than-wages/#7db37df066c1
[ii] https://www.collegedata.com/cs/content/content_payarticle_tmpl.jhtml?articleId=10064
[iii] https://www.cnbc.com/2016/12/23/the-next-victims-of-the-student-debt-crisis-mom-and-dad.html
[iv] US Department of Education
[v] https://www.usatoday.com/story/money/personalfinance/budget-and-spending/2018/05/08/how-does-average-american-spend-paycheck/34378157/