How to talk about college costs with your teen

Now that your teenager is in high school and college is just around the corner, it’s a good time to start having chats about higher education costs. Most parents aren’t able to foot the entire bill. If that’s true for you, it’s important to have an open and honest conversation with your teen about college costs. Here’s how.

Determine how much money you can contribute

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 to input your information and figure out expenses. The U.S. Department of Education offers a net price calculator that can help you estimate the net cost at various colleges.

Be transparent about money

Find a good time to sit down with your son or daughter to discuss finances for college. It’s important to be upfront with your teen about your family's financial situation and what you expect them to contribute so that you are on the same page when it's time to apply to schools. Talk about how much you have saved for their college education and break down the costs for tuition, as well as other expenses such as:

• Housing
• Meals
• Laundry
• Furnishings
• Clothing and personal items
• Textbooks
• Phone bills
• Travel costs
• Entertainment and other extra spending money

Discuss managing money as a college student

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. New college students are also flooded with credit card offers. It’s important that 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 the financial challenges ahead by offering suggestions and tips for managing money at college and beyond.

How can you create a college fund?

With college expenses growing each year, you’re probably curious about what options are available to help pay for the costs. Thankfully, there are many choices available for you to explore. Some you may want to discuss with your teen, while others could be researched years before your child leaves for college.

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, according to statistics by EducationData.org. Taking out a loan will certainly put your teen in debt, 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.

529 plan

A 529 plan is a tax-advantaged savings plan crafted to help encourage you to prioritize expected college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions. There are two types of 529 plans: prepaid tuition plans and education savings plans.

Life insurance

The primary purpose of life insurance is to provide a death benefit to beneficiaries. However, there may be unexpected ways you can use life insurance to help fund college education costs. A life insurance policy can help ensure the full funding amount is immediately available to pay for college. You don’t have to have passed on for this benefit to help. A permanent life insurance policy, in addition to death benefit protection, can help pay for college costs. A policy that accumulates cash value, such as an indexed universal life policy can provide a way to help pay for college costs. Some of the advantages include:

• Tax-deferred growth¹— Cash value growth inside the policy is generally tax-deferred.
• Policy loan options² — Access potential cash value from the policy to help pay college costs through policy loans, which are generally free from income tax. Check out this video if you want to learn more about how life insurance can play a role in your college plan.  

Talk with a professional

You may also want to discuss the potential costs with an agent who can look at your family income, savings, and expenses, and help you determine how much money can be devoted to college costs and how it may impact your financial life. Establishing this number early will be helpful when you do sit down and discuss costs with your teenager because it offers a concrete and realistic number to start from. Looking for a financial professional? Submit your information through our find an agent page.

1. The tax-deferred feature of the indexed universal life policy is not necessarily 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 this policy you should obtain competent tax advice both as to the tax treatment of the policy and the suitability of the product.

2. 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 your 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.

B3-MN-4-25

REV 4/2022