Ease Your Student Loan BurdenLife Events
Student loan debt has become the bogeyman of the post-recession economy, haunting millions of Americans with lingering expenses. However, if you’re currently saving for college, there may be some respite from this financial horror story.
All it takes is some forethought and sound financial planning.
Avoiding a worst-case situation
It’s not an easy world out there. Millions of young adults have graduated into a dicey job market, and what’s worse, they’re saddled with student loan debt. Many feel like they're stuck on a treadmill just trying gain a financial foothold.
The cost of college also has an impact on older generations. The parents or grandparents who co-sign these student loans may unwittingly assume the bulk of the payment responsibility.
Here are the facts:
- The U.S. Consumer Financial Protection Bureau estimated that outstanding federal student debt totaled nearly $1.2 trillion as of the summer of 2013.
- Of that outstanding debt, one out of five recipients had loans that were in deferment or forbearance. 8 percent of Direct loan recipients and 19 percent of FFEL recipients were in default.
- About 90 percent of those private loans were co-signed, most often by a parent or grandparent.
It seems pretty clear then, that by dragging down credit scores, hurting job prospects and eating away at available income, these student loan obligations affect people in many ways, across multiple generations. And, in the most tragic scenarios, if a student dies, parents are handed the outstanding student loans of their deceased child, while dealing with personal loss and grief. Loans issued by a private servicer can’t be discharged like a federal student loan or credit card debt.
What's a parent to do?
To balance their own retirement goals against the rising costs of college, parents have several financial planning options. You may not be able to avoid student loans completely, but these ideas may help you with paying them or reducing the amount of loans you may have to take. For instance, those who put down more upfront are likely to be less reliant on federal and private entities that fund higher education.
- Tax Advantaged 529 College Savings Plans* are investments created for a beneficiary to pay school-related expenses. Earnings in the account are income-tax free1 as long as the withdrawals are used for college expenses. Also, the person putting the money in the account retains control over it even when the recipient reaches the age of majority, so your child wouldn’t be able to use it, for instance, to buy a sports car without your permission and without having to pay taxes on the money.
- Buying a permanent life insurance policy is another option for parents. Permanent life insurance can be an option for parents looking to get out in front of payments for higher education. Permanent life insurance policies build cash value that policy owners may be able to withdraw or borrow from. 2
- Purchasing a juvenile permanent life insurance policy for children when they’re young can also help build savings for school. Purchase it now and the cash value will grow and may be accessed for education expenses. There's no need to commit to where those savings go, but many policyholders purchase these policies with the intention of supplementing a college fund.
- Families who encourage their children to work before or during college to earn money to pay for school may end up with less to pay and be able to manage debt more easily.
It's wise to consult with your Farmers Insurance and Financial Services Agent in order to determine which tactics may suit your family's needs. What’s important, and probably comforting to know, is that there are other college-funding avenues that don’t include taking on mountains of student-loan debt.
1 For informational purposes only. Neither Farmers New World Life Insurance Company, its employees nor its Agents provide legal or tax advice. Always consult your own attorney, accountant or tax adviser as to the legal, financial or tax consequences and advice on any particular transaction.
2 Distributions from a life insurance policy in the character of partial surrenders (withdrawals) up to basis or policy loans will be income tax- free, provided the policy does not violate Modified Endowment Contract (MEC) guidelines and the policy is not terminated during the lifetime of the insured. MEC guidelines are rules in the Internal Revenue Code which specify maximum premiums that can be paid without triggering adverse tax consequences for withdrawals. A policy termination during the life of the insured can cause the owner a single taxable event for any gains in the policy that were borrowed or withdrawn on or before the termination date.
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Life insurance, annuities and accidental death insurance issued by Farmers New World Life Insurance Company, 3003 77th Ave. SE, Mercer Island, WA 98040.