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College Planning: Where will the $ come from?

Posted by Larry Jones on Apr 26, 2016 4:13:00 PM
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You have just experienced a major paradigm shift:

As you stand in the maternity ward at 3:12 AM staring at little Bernie, you can't believe how your life has just changed. An hour ago life was all about you. Now, as Junior grasps your finger and holds on for dear life, you realize for the first time that your entire life from now on will revolve around this little fellow who's counting on you. You'd happily step in front of a bus for him if necessary.

The doctors come excitedly into the room to tell you that little Bernie holds the hospital record apgar score! He'll surely be a neurosurgeon or nuclear physicist.

But Harvard or Oxford won't be cheap....

How will you manage to pay for his education (even though you're sure the little genius will graduate in only 2 years)?

Bill Gates or Warren Buffet...

Would have no worries. Then there's the rest of us.

The first step is to make a plan. You'll need an asset allocation strategy that's consistent with your tolerance for risk and the amount of time until the funds are needed. For example, a risk-tolerant saver will usually select high growth mutual funds, while a risk-averse saver will choose bank CD's. But any well-crafted college savings plan needs to consider not only risk-tolerance and time horizon, but tax and financial-aid implications also. That's where the value of a professional planner becomes apparent.

I'd like to focus on three of my favorite types of accumulation vehicles for paying for college.

  • Securities (such as stocks and mutual funds)

When you have a longer time horizon and can afford some risk the market has historically rewarded investors well. The downside may be when you are just about to start using the funds, and a major market downturn happens. There are also tax consequences and possible financial-aid implications when using this approach.

  • Cash Value Life Insurance

Life insurance can be a powerful tool in saving for college. Loans against cash values are tax-free and do not offset some tax credits you may be entitled to such as the Hope Scholarship or Lifetime Learning Credit. Also, life insurance policies are not considered in federal financial aid calculations. On the downside, life insurance contracts have insurance and underlying investment costs, which are generally higher than mutual fund investments or 529 plans.

  • Section 529 Plans

This is a state-operated plan which is designed to allow individuals to set aside and invest funds for college. Investments in these accounts grow tax-free and are not taxed upon withdrawal as long as they are used for college expenses. The assets in a 529 will, however, count against financial-aid totals, unless the owner is a non-parent. Available tax credits can also be affected by a 529 plan.


Oxford is ready. Are you?

Intelligent college planning will pay off. These are just 3 possible ways to save for that rainy day. There are pros and cons of all of them, and a conversation with a good financial planner may save you lots of money over the long haul.

Till next time,



Topics: College Planning

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