How do I prepare to send my children to college?
The cost of a college education has increased to the point that it is difficult to afford. Also, college loans can follow the graduate for the rest of their lives due to long interest and repayment terms.
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Then; How do you prepare for rising costs?
Financing with 529 plans
529 plans are commonly used to finance a college education, and if the money is used for qualified educational purposes, it can grow tax-free and be removed from the plan tax-free. However, there are some drawbacks that need to be taken into account:
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If the money is not used for qualified college education costs, the growth of the money becomes taxable and subject to penalties when withdrawn. The money is often invested conservatively for lower growth and safety, but still remains subject to market downturns.
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If the person funding the 529 dies, the plan does not complete itself. Without additional funding, the 529 will often run short. There are limits on annual donations. (Consult a Tax Advisor) 529 plans only have one purpose and that is to finance university studies.
Financing using life insurance
An advantage of life insurance that you do not get in another accumulation vehicle is that the plan is automatically completed if something happens to the insured who finances the policy. If the insured dies, the death benefit can fully fund college education.
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Just as people buy car insurance to protect themselves against accidents, people with future obligations need life insurance coverage in the event they die prematurely or become permanently disabled and unable to work. If a person has children to educate among their obligations, it is necessary to have insurance to cover this temporary need.
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The most cost-effective way to pay for such protection is through a term policy. A family with young children might purchase a 20-year exclusive term life insurance policy to ensure the children have the money to go to college. It's important for families to have protection, whether it protects against property damage or the loss of a wage earner.
Highlights
529 Plans are being established across almost every state, if not every state in the nation, and are used specifically to help establish funding for education. These plans consist of investment funds and are sold through Investment Broker Dealers. That's where the 529 plans are placed.
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What is typically allowed in the US is that people who live there can bet up to $15K a year, since in the United States, when you make a donation, you are subject to what is called "Gift Tax". In Puerto Rico a donation is made and there is no Gift Tax
What does a 529 plan do?
The donated sum of $15,000 will grow deferred from the payment of contributions. The law states that if the accumulated money is used to pay higher education expenses at the university level, such as:
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Enrollment
Books
Computers etc.
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That money will not pay taxes when you withdraw it. However. The 529 Plan is not deducted from the return. It contributes from $15K to $300K in total for life and allows a single-sum family to put up to five times the amount of $15K, that is, it can reach up to $75K in a single year and that money basically goes to be deferred from the payment of contributions.