Kids Headed To College? Here’s a Financial Aid Secret You Need To Know

I’m almost an empty nester. My youngest daughter will be a high school senior in the fall. She has her SAT and ACT results and now its time to start thinking about college… and paying for it! I thought I’d share some thoughts on saving for college.

When my children were born, I did not establish a 529 plan or any type of dedicated college savings plan. Since you can make a withdrawal from an IRA for qualified education expenses, it didn’t make sense to have a separate fund with virtually the same tax treatment. And what happens if your kids decide not to go to college? A lot of tax is due!

Then there is the question of HOW to save the money. Most of the companies pushing 529 plans also sell Mutual Funds. How convenient. Now that the market has been steadlily climbing for the last 5 years, how confident would you be if you needed your money over the next 4 years like I do? Long term averages don’t mean anything when you have short term requirements. The major market indices dropped 35-40% in 2000-2002 and 2007-2008.

The money I intend to use for my daughters college has been invested in a real estate note earning 14% per year. The checks go into my Self-Directed IRA every month like clockwork. It seems so boring. I don’t have the excitement (Stress) of waking up and checking the market to see if my savings is still intact.

Financial Aid is another option. Have you ever applied for financial aid? They want to know everything! Checking. Savings. Securities. Home Equity. Any guesses on what they don’t ask about? The Cash Value of permanent life insurance policies!  This is the one last place where you can hide your wealth and you do not have to report it on the financial aid applications.

If I knew 17 years ago what I know now about financial products, I would have done things much differently.

First, I never would have put my savings into mutual funds. An Indexed Universal Life (IUL) would have provided better and safer returns over my daughter’s lifetime. Look at the chart below. My daughter was born at the end of 1997 so I’m showing the value of $1000 in the cash value of an IUL (labeled “Cap” because returns match the S&P 500–only to the upside–but are capped at 13%). Even if the markets had out-performed the IUL over this period, look at the stability and lack of fluctuations in the line labeled CAP.

Second, An IUL would have provided the family with a life insurance death benefit as part of the savings program.

Third, not that the IUL doesn’t stand on its own as an incredible savings vehicle, but you can leverage the cash value at any time. I could have saved additional thousands of dollars by treating my cash value as a bank over the last 17 years. I could even have funded the purchase of my real estate note with a tax-free loan against my policy. Think about that for a second. I could use the proceeds of a loan against my policy at today’s low rates to purchase a real estate note yielding 14%. That puts 10% in my pocket after covering the interest! Plus the cash value is growing at the rates indicated on the chart. That’s putting your money to work in two places at one time.

If you have kids going to college, like me, its a little late to change course, but if you know anyone with young children, pass this on.

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