You want the best for your kids. Same goes for nieces and nephews and those cute younger cousins. College can help set your family up for a better future, especially if you start making moves now to pay education bills later. A recent Northwestern Mutual Planning & Progress survey found that nearly all parents (99%) who identified themselves as Black or African American expect to cover more than half of the college bill for their children.
Whether they have their sights set on an HBCU or another school, half of a college bill can be a big number. For 2023-24 the average public four-year in-state tuition and fee bill was $11,260 per year, according to the College Board. Private four-year schools averaged $41,540 each year. When it comes to HBCUs, the cost of attendance is 27% less than attending a comparable non-HBCU, as UNCF points out.
But the numbers can feel intimidating—especially if you’re paying down your own college loans or credit card debt. But here are some steps to take now so you can hit your goals and still make it easier for the next generation.
1. Use a 529 plan for tax advantages and adaptability
A 529 education savings plan can be a great option if you have a few years or more until your kid heads off to campus. Families often turn to these savings plans because of the tax efficiency. With a 529:
- You won’t pay federal taxes on the withdrawals if you’re using them to pay for qualified education costs.
- Some states offer tax deductions or credits on your contributions. You claim them on your annual tax return.
- 529 funds that are not used for one child can be used for another eligible member of the family. Just change the beneficiary.
- If you don’t use the money for education, the beneficiary could move the money (up to a certain limit) into a Roth IRA. This allows the beneficiary to put the money toward their retirement instead of education.
Another appealing part of 529s is that anyone can contribute. Grandparents, aunties or anyone else can help out. Most plans offer a way to contribute digitally, providing a more lasting gift than the typical toy.
2. Take a good look at life insurance
When you plan to help your children or family pay for school, your income becomes even more important. People were already relying on it for day-to-day expenses, but now they will count on it for their college dreams. Life insurance helps to protect your income and ensure your kids will still be able to afford college should you pass away in midlife.
While you may know that life insurance pays a death benefit, there are some types of insurance that can benefit you while you’re still living. Whole life insurance offers a lifelong death benefit,1 and as you make payments, your policy will build up cash value. You can use that cash value for any reason (although doing so will reduce your death benefit). Some people use it to help pay for college.
You could take out a loan against the policy’s cash value. You can get the borrowed money quickly without tons of paperwork. Keep in mind that if you were to pass away before paying back the balance of your loan, your death benefit will be reduced by the amount of the loan.
Another option is to surrender, or “give up,” a portion of your insurance to use the cash value toward college costs. The downside is that you’ll no longer have that part of the death benefit, and there may be tax consequences.
3. Evaluate all loan options available to you
Many parents end up taking out public or private educational loans to pay for their kids’ college—or co-signing on their kid’s loan. If you see yourself doing that someday, you definitely won’t be alone.
But before you sign, think about whether you are a homeowner who could use an option such as a home equity loan or home equity line of credit (often called a HELOC). That might have a better interest rate than an educational loan because you’ve got the equity of the house as collateral. Remember, though, that your home would be at risk if you default on the loan.
Don’t sacrifice your retirement savings—and don’t let another relative sacrifice theirs
If you’ve already started saving for your retirement, that’s awesome. Keep putting money into the 401(k), 403(b) or individual retirement account. Resist the urge to pull back on that good habit to help a younger family member (even though your heart tells you otherwise). Same goes for Grandma if you hear she’s considering emptying out her retirement savings—it’s not usually recommended. While college students can take out student loans to fund their education, it is much harder for retirees to finance their living expenses.
While your heart is in the right place, you could actually be putting more pressure on your kids down the road if you’re not prioritizing your own retirement. Try to free up some money to save toward college by pulling back in other areas. Or think about co-signing on a loan when the time comes. A financial professional can help you evaluate options for supporting your family—for education and retirement.
Talk with a financial pro
There’s a lot to consider when it comes to saving for college. This is where a financial expert can share realistic ideas to help make college more affordable for the next generation.
Your financial partner will get to know you, learn where you’re at with your money today, and help you see things you might have missed. Then they’ll work with you to build a financial plan that helps you prioritize all your financial goals. Your plan will help you balance your needs and show you how you’re on track to reach your goals (even if something doesn’t go according to plan).
Get started today to make tomorrow easier so you can spend more time focusing on your family—and less time worrying about your finances. Learn more about building generational wealth with Northwestern Mutual.
1Unless you cancel your policy or stop paying your premiums.
This article is part of a paid program.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM) (life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries in Milwaukee, WI. This article is not intended as legal or tax advice. Consult with a tax professional for tax advice that is specific to your situation.
