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Unconventional College Funding Strategies

Unconventional College Funding Strategies

September 02, 2022

My wife and I both had student loans (SL) when we graduated from college in the '90s.  We didn't want our kids to have SLs so we decided early on to save.  Initially, we started saving in a 529 plan for each of our three children.  We then coupled that strategy with a rental property.  Here are a few ideas to fund college.  To learn more about each of these schedule a call with us.

1) 529 College Savings Plans - one of the most convenient ways to fund college.   Many employers allow you to withhold from your paycheck to fund the state-sponsored plan.  The key to 529 planning is starting early, knowing how much to save and where to invest.  Some 529's will offer a tax benefit if you use the 529 plan in your state. 

2) Student Loans - 70% of students who receive a bachelor's degree have education debt. Students who graduate without student loans tend to have a much higher net worth than those without student loans.  If you go this route you should pay the annual interest so that the loan isn't too large by the time your student graduates.

3) Scholarships / Grants - These are no-brainers if you qualify.  We found that applying for as many as possible is the key.  Having a great essay can make all the difference.  Consider this a part-time job for your student instead of working.  

What other ways can you fund college?

1) Roth IRA - your contributions to a Roth IRA are available to use for higher education costs.  No tax or penalty on your contributions if withdrawn before 59 1/2.  If you use a Roth IRA withdrawal for qualified education expenses, you will avoid the 10% penalty (pre-59 1/2), but you will still pay income tax on the earnings portion. Many people are surprised to hear this, but remember that your Roth IRA account balance is made up of contributions and earnings.  If you go this route try to use contributions and not earnings.

2) Real Estate - Using a rental property to fund college may be unconventional but worth the consideration, especially if you are handy.  What if you purchase a rental property with a fifteen-year mortgage (paid off before college)?  Your tenants pay off the majority of the loan.  You now have the equity and/or the monthly income to use for college funding.

3) Home Equity Line of Credit (HELOC) - the equity balance of a family's primary residence is not reported as an asset on the FAFSA form.  The interest rate on the HELOC may be lower than on a federal student loan.

4) Student Loan for 10K (ONLY) - with the Biden-Harris loan forgiveness program you may be able to borrow up to 10K for your student and if they meet the guidelines, they will have their loans forgiven.

5) Life Insurance - a permanent life insurance policy that accumulates cash value is an unconventional way to fund college.  The cash value grows tax-deferred but probably at a lower rate than a 529 investment.  Pros: Flexibility.  If your student doesn't attend college you can get the cash balance without paying tax and penalties like a 529 that is not used for qualified education expenses. It is not included in financial aid calculations.  Cons: upfront and recurring costs.  Remember you are buying life insurance so a portion of your premium is paying for the insurance cost.  This tends to be my least favorite unconventional method of funding college.

If you have other unconventional funding ideas or questions please let me know.