College Savings Plans:
Are There Limitations?

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Tax-advantaged college savings plans, like the 529 plan or an education savings account, have been heavily marketed to the American public. On the surface, they sound like great ideas. Save for the ever rising costs of college loan debt now by putting your money into these tax advantaged plans.

However, they must be looked at beyond face value. Are there limitations to not only these plans, but this strategy altogether?


  • Limited use.

    The funds from a college savings plan can only be used for college expenses like tuition, fees, books, supplies, equipment, room, and board required for college.

    The looming question is, "What if your child doesn't go to college?" What happens to those funds? Would it have been better in a child savings account?

    To use money for anything else, you would have to pay taxes based on your ordinary income tax rates rather than capital gains taxes. Bye bye tax deferral and hello taxes.

  • No protection.

    What if you become disabled? There's no built in disability insurance. Worse, what if you die? In the event of these unfortunate circumstances, you may not have enough money in one of these plans for college funding. These qualified plans won't help you.

    A more intriguing question is what happens if the college account decreases due to market fluctuations? The fact is, money in these plans go up and down with the market. And, you cannot write off any losses on your tax return if you lose in these government plans.

  • Lost opportunity cost.

    Your money only does one thing. It goes into one bucket for only one purpose: college funding. But, many don't evaluate the opportunity cost with these plans. It's one of the eroding factors of money.

    For example, let's say you saved $100,000 in a college savings plan. Fortunately, your child has spent all the money on college costs, fully depleting the account.

    The downside is that once you've spent that $100,000, it's gone forever. If you were 45 years old at the time, that means in 20 years, that money is still gone at your retirement age of 65.

    If you had invested that amount for 20 years at 10% interest, you would have over $673,000. Take on another 20 years and at age 85, you would have almost $4,526,000! Maybe your child should just wait for his inheritance.

All kidding aside, the qualified college savings plans has its limitations. We suggest going beyond focusing on the product and looking for the best strategy.

Explore other strategies that fill in these gaps.

A Better Alternative

The living benefits that whole life insurance provides is a great alternative.

Whether you live, die, or become disabled, these policies can make funds available for college or any other need. Because of the disability rider and the death benefit, there is no need to worry about accidents in life deterring you from funding college tuition.

Market fluctuations won't take away from funds. You have steady growth in a safe, liquid, interest earning vehicle.

The biggest crutch of the qualified college savings plans, opportunity cost, is one of the advantages of whole life insurance.

Infinite Banking Concept

See our Infinite Banking Concept 3 part series:

First, understand the answer to "How do banks make money?". Next, discover the Infinite Banking Concept. Last, learn how infinite banking can accelerate your wealth.

If you borrow the cost of college from your life insurance company in the form of a policy loan, you can use the cash value in your policy as collateral. You still have the death benefit to protect you from death and the cash value within the policy earning you interest. Your money is doing multiple things; that's the velocity of money.

The good news is that you don't have to pay back the loan since policy loans don't have to be repaid.

However, it would behoove you to repay the loan, with interest, once you understand how to utilize the Infinite Banking Concept.

OPM - Other People's Money

A better strategy would be to utilize other people's money in the form of federal college loans, a home mortgage, and a home-equity line loan/line of credit.

The cash value in your life insurance policy can act as collateral. Such loans will be partially or fully tax-deductible. Now that's taking advantage of tax savings.

Again, you can use your cash value to pay these loans back while the value in your policy is growing with interest.

College savings plans sound great on the surface, but thoroughly do your research. These qualified plans have their flaws. Although the purpose is to pay for college tuition, don't pidgeon-hole yourself into a plan that has your dollar doing just one thing.

Investigate plans and strategies that velocitize your money, utilize tax savings, and still grow at the same time.

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