Do you, like many Americans, need to find the best way to pay for college expenses? This ongoing concern of both parents and those heading off to college themselves strikes both those who have some savings and those who don’t.
If you have been able to save up something for your or your kids’ university costs, how can you make the most of these savings? One method that many overlook is the ability to utilize an annuity for school costs. How would you do this? Here are two different options.
1. Paying Direct Expenses
The simplest way to use an annuity to cover higher education is to use withdrawals to pay the school directly for expenses like tuition, books, and room and board. Unlike a 529 savings account, your annuity can cover any type of expenses you wish rather than limited to certain qualified expenses. And if your child receives a scholarship or grant, you can use the annuity for other expenses.
To use this method, you will need to purchase either a deferred annuity or an immediate annuity. Deferred annuities are good for those whose children (or themselves) won’t start college for another five to ten years. You would purchase the annuity now and wouldn’t be able to withdraw until then. An immediate annuity can be withdrawn starting right away.
Armed with an estimate of higher education expenses, you can purchase an annuity based on how much you would receive in each payment. Due to the increase of interest, you receive more in payments than you invested, allowing you to pay for school and still earn more money.
2. Paying Student Loans
Student loans have a bad reputation due to their non-chargeable nature and the difficulty some borrowers have making payments. But, if managed well, student loans can also be a benefit due to extremely low interest rates and a lengthy repayment term.
If you have funds for college, though, why opt to utilize student loans? The answer lies in the rate you receive for investing the money. If you can get an annuity that pays 10% interest while student loans offer rates of about 5%, you can earn an additional 5% if you let some of that money sit in the investment. If, on the other hand, you take it all out now to pay for school, you don’t earn a penny.
To take advantage of this extra earning power, you would sign up for low-cost public student loans when available. Evaluate private student loans on a case-by-case basis depending on their interest rates. Most student loan payments are deferrable until graduation, so you have time to build up more money for an annuity or to purchase a deferred annuity.
Purchase a deferred or immediate annuity based on the timeline for when you must begin repayment and base it on how large the monthly or annual payout would be. Then, simply use the withdrawals to make payments each month. Because the money is paid out in increments, you can time it to coincide with payments due and won’t be tempted to use it for other purposes.
The First Step
If you think that an annuity might be the best way to pay for your or your children’s schooling, consult with an experienced annuity provider. Annuities can be complex, so you need to fully understand how it works in order to make the best choices.
At Tax Deferred Benefits, LLC, we can help. Our team of trained professionals will guide you through the decision-making process and help you find the right annuity for your family. Call today to learn more.