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WHY 529 PLAN MAY NOT BE THE BEST WAY TO SAVE FOR COLLEGE?

February 9, 2018

Today, we're going to be talking about college funding and more importantly, when a family needs or wants to use a modified endowment contract (MEC) for college planning and college funding.

 

So, the big picture is, we have a family. The family has done what they've done best for their kids, they've saved money to go to college. They maybe have $50,000, $100,000. Whatever the amount is, it's not enough money to get into the school of the child's choice. And what's really a shame is, even though the parents have done everything correctly, that little bit of money, which would be $50,000 or $100,000 – for most families, that's a lot of money, it'd be a lot of money for me – is keeping them from receiving financial aid. Because when they file their FAFSA, their EFC is too high.

 

So, the schools are going to say, "Well, you have all this money. We're not going to give you anything." Where the reality is they should be able to get some kind of financial aid, grants, or a scholarship, to pay the difference. A lot of times, families are disappointed. Now, they saved money for their kid, their kid got accepted at a top-tiered school, a private school, and you have to tell them, "Well, unfortunately, we can't afford it because we saved money for you." It's a heartbreaking story. I hear it more often than not, but there are solutions.

 

Sample scenario

A common solution we have is, we put money into a modified endowment (MEC) contract. Now, the reason why we use that product is because of the guarantees.

 

If we look at this sample scenario, the client has put in $100,000. Because the way we structure it, we're at $99,000 Policy Year 1. No matter what happens, our cash values are very strong and we design it that way on purpose, so you can have access to your cash value. By Policy Year 2, you're above the basis. So that $100,000 deposit is above $100,000, and it's pure growth.