Borrowing for College -- The Ultimate Parent Trap

Scary headlines are making the rounds, leaving many college students wondering if student loan repayment will, like income taxes or your monthly utility bill, turn into a life-long obligation. Whether or not you believe college student loan debt is the next financial bubble set to burst, it is difficult to deny that the rapidly growing debt among college students and recent college graduates is cause for alarm -- especially if you or someone in your family is carrying a heavy student loan debt.

For college graduates, the repayment of student loans often means postponing buying homes or cars, getting married, and even saving for retirement. In fact, a recent Pew study found that "39 percent of all adults ages 18 to 34 say they either live with their parents now or moved back in temporarily in recent years," including 53 percent of those age 18 to 24. And a recent Western Union survey found that 12 percent of students believe they may not graduate due to how much they owe, while 21 percent said student loan debt has negatively affected their grades.

These studies are a clear reminder that the burden of student loan debt does have widespread negative economic and social impact. With few options available, students often turn to their parents to bail them out, putting a crack in their parent's nest eggs.

Is sacrifice the solution?

About half of all parents who make funding their kids' college education a priority have little left for their own retirement, according to a MassMutual study. The study found that only three in 10 parents believe they are adequately funding their own retirement. About 25 percent of respondents said they are caring for elderly parents while trying to help their kids pay for college.

So what's the answer to the student loan dilemma? Is it students pinching pennies and eating more ramen, moving home after college and postponing marriage? Or should parents keep shortchanging their own retirement to give their kids a leg up? Neither.

Defying conventional wisdom

To avoid these drastic measures, families today must look beyond the conventional methods of paying for college, most of which come with hidden drawbacks and many strings attached to them. Traditional college savings plans, like 529 college savings plans, UGMAs (Uniform Gifts to Minors Act) and UTMAs (Uniform Transfers to Minors Act), are typically invested in the stock market and provide no guarantee on growth rate -- or even on the return of the principal amount invested.

Tom Snyder, a former Verizon lineman, knew this when he started a college fund for his daughter Kelsie. Because she was 14 before he could begin funding that plan, he knew he needed a plan that would grow by a guaranteed and pre-set amount each year.

Tom turned to Bank On Yourself, a safe and time-tested savings method using specially designed dividend-paying whole life policies that allowed him to know the minimum guaranteed value of his plan on the day Kelsie started college. So even though Tom started late, he would have $35,000 in the policy when she started school at age 18. That more than covered the tuition at their best state school.

Tom also recognized other benefits:

• College Financial Aid: Because funds are sitting in the cash value account of a whole life insurance policy, they do not count against you in calculations for financial aid. These funds are not reported as assets on the Free Application for Federal Student Aid (FAFSA). This means that your chances for scholarships and financial aid are greatly increased.


• The Last-Minute College Funding Alternative: Because of the unique features of the Bank on Yourself concept, you may even be able to start funding a college plan when college is only 2-6 years away and still have enough to help pay college tuition. In addition, the money you take from your plan will be replaced as you pay yourself back, and you'll be able to use those dollars for retirement or other financial needs and wants.


• Your Money Can Continue Growing As You Spend It: A handful of companies offer policies with a feature that lets you continue earning the same interest and dividends on the money you borrow as though you never took it out.

In our family, my husband and I are using this strategy to help save for our two grandchildren's college education. We started policies designed to maximize the power of the Bank On Yourself concept for each when Jake was 6 and Halle was 3. The plan we set up for Jake will provide about $90,000 for his college education expenses by the time he graduates, based on the current dividends. And Halle's plan is predicted to provide about $125,000.

Both plans grow by a guaranteed and predictable amount each year and are from a top-rated life insurance company that has paid dividends every year for more than 100 years.

If you start early, relatively small monthly contributions can ensure you'll have a substantial, guaranteed sum of money when it's time for college.

As a consultant to financial advisers, Pamela Yellen investigated more than 450 savings and retirement planning strategies seeking an alternative to the risk and volatility of stocks and other investments. Her research led her to a time-tested, predictable method of growing and protecting savings now used by more than 400,000 Americans. Pamela's book, Bank On Yourself: The Life-Changing Secret to Growing and Protecting Your Financial Future, is a New York Times Bestseller. Learn more at www.BankOnYourself.com

 

 

 

Follow Pamela Yellen on Twitter: www.twitter.com/PamelaYellen

Comments

[RetiredWorking]

03:57 PM on 07/01/2012

I'm financing my son's college education. We both know that doing so is a major sacrifice for my wife and me. We have very close relationships with our children. Single son and his married sister have agreed to care for us in our old age. It is a promise I know they will keep. Everything we have saved and amassed will go to them and their children. Then their children and grandchildren will inherit what they save and amass. We believe in zero population and providing for our future generations.We have enjoyed our lives and want our descendants get a helpful push to do the same. My wife and my descendants never thought like us. They struggled to survive, and were intent on living their lives and shooing their children out of the nest.

[Independant]

02:04 PM on 07/01/2012

Like my dad said, No parent owes their child a college education,,, if a kids deserves it they will have worked hard enough to get some of that free money and a scholarship. A college education should not be free to justy anyone. You should have earned it though good grades and achievment. And if should not be easy it should be hard. Otherwise a degree is worthless! ! ! And guess what most 4 year degree are already just take,,, worthless ! ! ! I am all for asissting a smart hard working student who can not afford college but I am toally against using tax payer money to send lazy or those without the mental capacity to college.

[RetiredWorking]

04:16 PM on 07/01/2012

4-year degrees are not worthless. They are required for many job positions.

"I can do the job; I just don't have that college degree the employer requires!"

How many times have you heard someone say that?

[o2bncapecod]

12:40 PM on 07/01/2012

I don't believe that Student's debts should be 'forgiven'. I agree that people do take their education more seriously when they earn and pay for it. They chose to go that route, knew the expense involved and it's no different than anyone purchasing something and going into debt to do so. Banks should be required to give very low term loans, however - even if only 1%. Many of us who chose college had parents who couldn't afford it. We joined the service to get benefits under the GI bill (which did help a great deal); we had to work during college; apply for student grants or assistance that might be available or had to go to colleges that weren't the ones we would have liked to attend but had to. As in any other fact of life - you play, you pay. It'd be wonderful if everyone could go free. It would be wonderful if alot of things in life were free but that isn't reality.
There are many factors I'd like to see so that it could help but just not paying what you owe isn't one.. Reality is - you spend several years to be a doctor or lawyer, you're expected to have a much higher income then someone who doesn't or can't. You have to realize education to meet those mandates is going to cost money. Nothing's free in life and this might be the first reality check that these 'new adults' need to face.

[RetiredWorking]

03:33 PM on 07/01/2012

There are other ways of forgiveness. My friend left his comfortable position at a high school in a middle-income district to teach middle-school in a low-income part of town. This forgave $17K of student loans.Instead of commuting, his pregnant wife and he moved and now live 10 minutes from his work. They have no regrets, and love raising their daughter a distance away from well-intentioned family.
SIL's cousin's mulling over relocating from L.A. to Ka'u Hospital. If she does, her $100K+student loan is forgiven.

[d1anaw]

10:04 AM on 07/01/2012

Personally, I think people take their education more seriously when they earn and pay for it themselves. Throughout all my years of college, and they were extensive, it was relatively easy to tell who the ones who were putting themselves through and who were the ones going on someone else's dime. Those would be the ones who thought it was acceptable to raise the fee for the required student body cards to upgrade a video game room that the majority of students didn't use.

[fricodam]

04:31 PM on 06/27/2012

Again, one more band aid on the bleeding wound. Contain and reduce the cost first!