College Funding Options
529 Plans
A 529 plan is an investment vehicle designed to help parents and families save for future higher education costs – on a tax-advantaged basis – for a designated beneficiary. 529 plans are administered by the individual states, with each state having a different plan and different tax advantages. 529 plan funds are not subject to tax when used to pay for qualified education expenses for the designated beneficiary, such as tuition, fees, books, and room and board. Contributions are not tax-deductible for federal tax filing, however contributions may be tax-deductible at the state level. Connect with a financial professional.
Coverdell Education Savings Account (ESA)
A Coverdell Education Savings Account (ESA) is an investment vehicle and trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries who must be under the age of 18 when the account is established. The age restriction may be waived for special needs beneficiaries. While more than one ESA can be set up for a single beneficiary, the total maximum contribution per year for any single beneficiary is $2,000. Coverdell accounts are like 529 plans; however, for elementary and secondary school, Coverdell funds are allowed for other school expenses. Like many 529 plans, contributions are not tax-deductible for federal tax filing.¹ Connect with a financial professional.
Permanent (Whole Life) Insurance
A permanent (whole life) insurance policy provides lifelong insurance protection, which can be crucial to help pay for a beneficiary’s education should the insured pass away. Also, whole life policies build cash value, which can be used while the insured is living to help meet a wide range of financial goals, including helping pay for college. Using the cash value in your policy as part of an overall college funding strategy offers many advantages, including policy loans not being subject to credit approval or income taxes and penalties. *
A whole life insurance policy loan may be an attractive way to supplement an overall college funding plan and alternative to a student loan, a home equity loan, or borrowing from a retirement account. Connect with a financial professional to learn more.
Government Loans
A government school loan is offered and backed by the federal government, also known as a federal student loan. Federal student loans tend to have greater benefits than private loans, making them a better choice for most people. Federal student loans generally have lower interest rates and offer better borrower benefits including more favorable repayment plans and greater disaster relief. See more about the Free Application for Student Aid (FAFSA) below. However, it’s important to understand that federal student loans have annual limits, which means some borrowers may pursue private student loans or leverage their life insurance policy to make up for a gap in college funding. Learn more.
Private Loans
Unlike a federal loan, a private student loan is not backed by the government. Instead, this type of college loan is backed by a bank, credit union, or online lender. Unlike federal loans, most private lenders give borrowers the option to choose between fixed and variable interest rates. Variable rates often start off lower than fixed rates, especially during periods of low rates across the board, but they can rise over time. For the average student, fixed rates are the safer bet. But if you have stable income and plan to pay off a student loan quickly, it can be beneficial to choose a variable rate and pay down the loan while rates are low, avoiding potential increases in the future. Learn more.
Grants & Scholarships
Grants and scholarships for college are essentially free money to help you cover the cost of your education. Unlike student loans, college grants or scholarships don’t require repayment, except under certain circumstances, like withdrawing early from a program or a change in your enrollment status. The key difference between college grants and scholarships is that grants for college are typically need-based. Scholarships may be need-based or merit-based, which means they’re given out based on some kind of ability, hobby, ethnicity, religion, etc. ²
It’s important to know that college grants aren’t always assured for every year of your education. For instance, a shift in your family’s financial circumstances could render you ineligible for a need-based grant in subsequent years. Likewise, merit-based grants may not be automatically renewed annually; maintaining a specific GPA or fulfilling other criteria might be necessary to remain eligible. Learn more.
Free Application for Federal Student Aid (FAFSA)
FAFSA is a free online application that determines an individual’s eligibility for federal financial aid. The aid offered through FAFSA includes government loans, grants, and work-study programs. Federal aid is not distributed to you or the student directly. Instead, it is provided to the college. The college will use your federal aid eligibility (EFC) and combine it with their own aid and/or merit scholarships to create a total financial aid package that includes federal aid loans, grants, and work-study:
Direct Loan
Pell Grant
Federal grant (does not have to be paid back) that is available to undergraduate students. Will need to be reapplied for every year.
Work-Study
Federal program that provides part-time jobs for students with financial need, allowing them to earn money to help pay education expenses.
- Internal Revenue Service, Topic no. 310, Coverdell education savings accounts, 2024
- U.S. Department of Education, Federal Student Aid – Federal grants are money to help pay for college or career school.
IMPORTANT DISCLOSURES
* Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty if the policyowner is under age 59½. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured. The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. While the policy allows for loans, you should know that there may be little to no cash value for loans in the policy’s early years.
Product availability varies by carrier, state, and individual eligibility. Not all products listed are available in all states or to all applicants. Product descriptions on this page are for general informational purposes only and do not constitute a solicitation or offer to sell any specific insurance or annuity product. All products are subject to underwriting approval and applicable state insurance regulations. Riders and benefits are subject to additional charges, terms, conditions, and limitations. Variable products involve investment risk, including possible loss of principal, and are sold by prospectus. FundaDream Insurance Solutions, Inc. is a licensed California insurance corporation. Consult the applicable carrier contract for full terms, conditions, and limitations. FundaDream’s charitable giving is made from general corporate revenues at the sole discretion of FundaDream leadership and does not constitute compensation to any licensed insurance professional.
The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. While the policy allows for loans, you should know that there may be little to no cash value for loans in the policy’s early years.
The information provided is not written or intended as specific tax or legal advice. FundaDream, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
Insurance products and services are offered through FundaDream Insurance Solutions, Inc., California License No. 0M95835