Using an annuity to help pay for college


Saving and paying for college can be a challenging goal and you may be among the many people who worry about the financial pressure that funding higher education can bring. The cost of college continues to rise: average tuition and fees are $35,807 at a private school, $9,349 for state residents at public colleges and $27,023 for out-of-state students at state schools. Thankfully for parents and grandparents, it’s never too early to start saving and there are many options to help you prepare for one of the most important milestones in the lives of your children and grandchildren.

529 plans
A common option used for paying for college and educational expenses is a 529 plan, which is an education savings plan sponsored by a state or state agency. It has several advantages:

  • 529 plans can be purchased not only by parents, but also grandparents and other relatives
  • Your earnings in the 529 plan grow tax-deferred
  • Any qualified withdrawals made are tax-free
  • As a student reaches college age, the accumulated funds can be used to pay for qualified expenses including tuition, room and board, books and computer equipment
  • Many states offer tax benefits for contributions to a 529 plan

While 529 plans have many advantages and can be useful in preparing for the future, there are limitations to consider as well.

  • An account can lose value due to market downturns depending upon the allocations selected
  • You may pay penalties on any earnings if the money is not used for education purposes
  • A portion of the account balance may affect the amount of financial aid awarded
  • Many plans include yearly fees and administrative costs

Plus, if your child receives a scholarship, you may only need a portion of the money saved in your 529 plan. If there are remaining funds after your child is finished with college or if a child decides not to enroll in school, the beneficiary can be changed to another family member. If you have no other family members still in school or left with college debt, you may have to pay penalties to withdraw your savings for other purposes, depending on the rules of your state’s 529 plan.

Using an annuity
One tool to consider as part of an overall college saving strategy is a fixed or fixed indexed annuity. A significant benefit of these products is your value can grow tax-deferred and is protected from downside market risk. So when the market is up, your money can grow, but when the market is down, you do not lose any of your hard-earned savings. Similar to a 529 plan, if your child receives a scholarship or decides to pursue another path besides college, the money in your annuity can be accessed for other purposes.

Keep in mind that annuities are designed to help you reach long-term savings goals. While most annuities allow you to withdraw a certain amount each year without penalty, you’ll likely pay charges on withdrawals over that amount during the annuity’s Withdrawal Charge period. This period typically ranges from five to 10 years or more, depending on the annuity. Withdrawals from an annuity, even if used for educational purposes are considered income and may affect the student’s financial aid. It’s important to remember that withdrawals from an annuity may be subject to state and federal income tax. In most cases, withdrawals taken before age 59½ will also be subject to a 10 percent IRS penalty. When considering this strategy, you should consider your age at the time you will withdraw funds to pay for college to ensure that you will be at least age 59½ and will not incur the IRS penalty.

Helping pay tuition
As with many financial plans, there is no time like the present to begin saving. An annuity purchased when your children are young can assist with tuition costs down the road. One option would be to purchase an annuity with a Withdrawal Charge period that coincides with the length of time it takes for your child to reach college age. For example, if on your child’s 8th birthday, you purchase an annuity with a surrender charge period that ends in 10 years; your child will be 18 and entering college. At this time, you’ll be outside the Withdrawal Charge period, meaning you’ll have full access to the annuity’s value to supplement tuition payments. Keep in mind that withdrawals taken before age 59½ will also be subject to a 10 percent IRS penalty. Again, it’s important to ensure that you will be at least age 59½ when taking withdrawals from an annuity.

Paying off student loans
Graduating with student loan debt comes with tremendous responsibility, especially since interest continues to accumulate as time goes on. More than 3 million students have student loan debt greater than $100,000 and repaying those loans can be a significant hurdle. One way to help reduce a student loan balance is using income payments from an annuity. Over time, your premiums grow tax-deferred and then at a later date, you can elect to begin receiving payments. Depending on the type of annuity you choose, you can receive income immediately or several years later. These funds can then be used to help reduce any remaining student loan balance. Remember, some annuities specify that you must be a certain age before starting income payments, and there are tax penalties for taking withdrawals prior to age 59½. 

As you begin to take steps toward saving or paying for college, talk to your financial professional about which solutions fit your individual needs and objectives and can help make higher education accessible and more affordable. By starting the conversation now, you can help bring the dream of your child’s or grandchild’s education within reach while still meeting your other long-term financial goals.

This information is brought to you by Athene — where unconventional thinking brings innovative annuity solutions that can help make your retirement dreams a reality.

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