No doubt you're aware of the debt burden facing students upon graduation these days. According to the Consumer Financial Protection Bureau, the outstanding student loan debt in the US now exceeds $1 trillion. For the 2015 academic year, undergraduates will be borrowing at 3.86 percent for subsidized and unsubsidized loans, but the rates go up to 5.41 percent for graduate students and 6.41 percent for parents who borrow to pay for their child's college education. There is a rate ceiling — 8.25 percent for undergraduates, 9.5 percent for graduate students, and 10.5 percent for parents — which may not be reached for another 10 years according to the Congressional Budget Office. But the reality is that graduates struggle to make any progress paying down their loans and may be saddled with debt for much of their lives.
Allyson wants a different outcome for her child and is beginning to look into her options:
“I have a beautiful 10-month old daughter and I would like to open a college savings plan for her. I know that there are a number of options, with different pros and cons for each. My coworker told me today about the Gerber College Savings Plan, which sounds almost too good to be true. In my research into the various ways of funding your child's college education, I have never seen this included as a possible option. It doesn't show up in the GRS archives when I search for it, even though college savings ideas have certainly been discussed. Have any readers used the Gerber College Plan to fund their children's college education? What has been your experience? It sounds almost too good to be true so I am trying to figure out what the pitfalls might be.”
Essentially, the Gerber Life College Plan is a policy that allows you to decide how much you'll put aside every month and affords you “full life insurance protection” throughout the period you are saving. “At the end of the term, the policy delivers a guaranteed payout to use for college expenses (or anything else).” As long as the premiums are paid and there is no outstanding debt against the policy, you are guaranteed to receive at least as much as you invested (between $10,000 and $150,000) and possibly more.
Gerber makes it easy to save for your child's education, but it is essentially life insurance. A 529 college savings plan can accomplish the savings goal tax-free, presumably while providing a better return. (Although 529 plans naturally involve more risk and require more attention, risk can be adjusted by placing the principal in safer investments as the child grows.) A less expensive life insurance policy can then be purchased to provide the same benefit.
In the end, it's a decision each family has to make taking into account their budget, goals, and tolerance for risk. But by taking steps to save for her daughter's education now, Allyson is dramatically reducing the possibility that she (or her daughter) would have to mortgage her future for a college education.
What is your advice for Allyson? Are there pitfalls to the Gerber Life College Plan? What are the tools Allyson will need to determine what's best for her family?