Plan for Tomorrow | Discussing how to save for college with your teen
A mother discusses college with her teen son.

Discussing how to save for college with your teen

May 31, 2023, 4:58:58 PM | Reading Time: 5 minutes

If your teenager is starting to think about college, it’s a good time to start discussing higher education costs and what you can afford. Having an open and honest conversation with your teen about college expenses will ensure you’re on the same page financially when it’s time to apply for schools.

Determine how much money you can spend

Before you sit down and talk with your teen, it’s a good idea to figure out the maximum amount your household can afford for four years of college. Find out how much average tuition costs are for schools your child might apply for and use a tool like a college cost calculator.1 to input your information and figure out expenses. It’s important to be upfront with your teen about your family's financial situation, how much you can contribute, and the costs you expect them to shoulder. Find a good time to sit down with your child and discuss how much you have saved for their college education.

How can you cover college costs?

It’s vital to talk to your teen about all the possible funding sources for school, such as financial aid, scholarships, grants, and loans. A good way to start the conversation is to direct your teen to an official resource website on aid options.

Scholarships and grants

Have your teen investigate scholarships and grants first. Scholarships are typically based on merit, while grants are based on financial need. Both are awarded and don’t need to be paid back.

Financial aid

Your teenager can fill out the FAFSA (Free Application for Federal Student Aid) for each college they apply for. The online form asks for information about student and parent/guardian finances. This information is sent to colleges and they review the form to put together a financial aid package. Each package will detail your teen’s expected cost and the amount of financing offered.

Student loans

To afford college, many teens and their families take out student loans. In 2021, more than 43.4 million people in the U.S. have student loan debt that averages around $37,000.2Taking on debt is an important financial decision, so it’s important to discuss how that money owed will affect them in school and after. If your teen needs to borrow money, it’s a good idea to look to federal student loans first. These loans are issued by the U.S. Department of Education and come with borrower benefits, such as subsidized interest, fixed interest rates, flexible repayment plans, and even loan forgiveness if they work in the public service sector.

Life insurance

The primary purpose of life insurance is to provide a death benefit to beneficiaries. Death benefit protection can make life insurance an attractive choice to help fund a college education. While many people are aware that the cost of a college education has been on the rise, many underestimate just how large this cost has grown. The average published in-state tuition and fees for four-year public colleges and universities for the 2020-2021 school year was $10,560, increasing 1.1% from the previous year.3 What many people may not realize is that with the right life insurance policy, you can secure death benefit protection while helping pay for a college education.

How can life insurance be used for college funding? After a thorough needs-based discussion with a financial professional, you select a life insurance policy that matches your needs. The basic steps typically include:

  • Purchase a permanent life insurance policy. The policy provides death benefit protection and a way to help accumulate cash value on a tax-deferred basis.4
  • If the unexpected happens and you die prematurely, the life insurance death benefit would be paid generally income tax-free5 to beneficiaries.
  •  Alternatively, when it comes time for you to pay tuition costs, you may access the policy’s potential cash values through generally tax-free loans or withdrawals.6

After helping pay tuition costs, you may reposition the policy for other possible needs. If you want to use life insurance to help pay for your child’s college education, be sure to contact your insurance company first. You should also consider talking to an agent to make sure this is a strategy that will work for you and your family.

How to encourage smart money moves

College is a completely new level of freedom for most teenagers. There is a lot of pressure to attend events, concerts, and other social activities with friends – many of which cost money. New college students are also flooded with credit card offers. It’s important they understand the money pressures they will face while away at school, especially if they have loans or responsibilities that come with a scholarship. Take the time to help your child prepare for financial challenges by offering suggestions and tips for managing money at college and beyond. The better your son or daughter knows what to expect, the better they can prepare.

1 U.S. Department of Education


3 2020 Trends in College Pricing published by The College Board

4. The tax-deferred feature of universal life or indexed universal life insurance is not necessary for a tax-qualified plan. In such instances, you should consider whether other features, such as the death benefit and optional riders make the policy appropriate for your needs. Before purchasing a policy, you should obtain competent tax advice both as to the tax treatment of the policy and the suitability of the product.

5. Neither North American Company nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.

6. Policy loans from life insurance policies generally are not subject to income tax, provided the contract is not a Modified Endowment Contract (MEC), as defined by Section 7702A of the Internal Revenue Code. A policy loan or withdrawal from a life insurance policy that is a MEC is taxable upon receipt to the extent cash value of the contract exceeds premium paid. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59½, with certain exceptions. Policy loans and withdrawals will reduce cash value and death benefit. Policy loans are subject to interest charges. Consult with and rely on your tax advisor or attorney on your specific situation.

The primary purpose of life insurance is to provide a death benefit to beneficiaries. Because of the uncertainty surrounding all funding options except savings, it is critical to make personal savings the cornerstone of 0000your college funding program. However, even a well-conceived savings plan can be vulnerable. Should you die prematurely, your savings plan could come to an abrupt end. To protect against this unexpected event, life insurance may be the only vehicle that can help assure the completion of a funding plan. In addition to the financial protection aspect of insurance, the tax-deferred buildup of cash values can be part of your college savings plan. Generally, if the policy is not a Modified Endowment Contract then tax-free withdrawals can be made up to the contract's cost basis. Moreover, if the policy is not a Modified Endowment Contract, then loans in excess of the cost basis are also tax free as long as the policy remains in force.