Whether you are a parent thinking ahead about funding your child’s post-secondary education, or considering your own college expenses, or if you’re juggling your own student debt, there are financial options you may consider to help pay for college or pay down student loans.

College Funding

Coverdell Education Savings Accounts

Contributions up to $2,000 annually per child can be made to a Coverdell Education Savings Account (Coverdell ESA). Earnings can accumulate tax free, and withdrawals can be made tax free for qualified education expenses. However, contributions can only be made until the child turns 18. A Coverdell ESA can also be transferred to another child if the original recipient won’t need to use the funds in the account.

For more information on the Coverdell ESA www.IRS.gov and search for “Coverdell Education Savings Accounts".

Section 529 plans

State-sponsored Section 529 college savings plans offer individuals a tax-efficient way to invest for future college costs and provide significant flexibility regarding contributions. Withdrawals used to fund qualified higher education expenses are not subject to federal taxes and may also be free of state taxes for residents of states that allow this benefit. The annual contribution maximum is determined on a plan-by-plan basis (so it may be more than the $2,000 limit put on Coverdell ESAs). You are able to enroll in another state’s plan if the fees and features of that plan are more attractive.

Visit http://www.savingforcollege.com to compare different states’ 529 programs. In addition to higher education, contributions can be used to pay for K-12 tuition and expenses, up to established limits. 529 plans are not just for children; adults can open accounts for themselves if they are returning to school. Another benefit is that a 529 account can be rolled over to another family member’s 529 account if the account will not be used for the originally intended individual.

Financial aid

Many students receive some form of financial aid. Applying for loans and filling out the annual FAFSA form can be intimidating but necessary in determining how much aid can be obtained and through what sources. Owning a home and other financial assets doesn’t necessarily mean a family will not qualify for financial aid. In many cases, students may be able to supplement federal aid (such as Stafford Loans, Perkins Loans and Pell Grants) with other aid packages offered by the schools they attend.

Visit http://www.studentaid.ed.gov for more information.

Cash Value Life Insurance

With any life insurance (term or cash value), the benefit can be used for expenses, such as a child's college education, in the event the policyholder dies. However, death isn't the only way to use a cash-value life insurance to pay for education. This type of policy accumulates cash value on a tax-deferred basis. These funds can then be accessed as a tax-free loan or withdrawal when it comes time to pay your child's college tuition costs. A cash-value life insurance policy offers the ability to take out a very low interest loan against the cash value of your policy. Doing so, however, will reduce the policy’s death benefit, unless that loan is paid back.

A cash-value life insurance policy may provide an alternative to a 529 college savings plan, as there aren’t any stipulations as to how that money can be used. However, you will have to pay interest if you choose to repay it. Check with a financial professional to determine if this option may be right for you. If you currently hold a cash-value life insurance policy, check with your life insurance company for details and any other stipulations.

Additional options

When funding a college education, you may have access to other financial options. But these options come with additional considerations.

Retirement Accounts:

Your retirement account may provide a loan or financial hardship provision. While borrowing from your retirement account may seem like a good option, it’s important to remember that loans often come with fees, and withdrawals may be subject to a 10% penalty and be taxed as income unless you are over the age of 59-1/2. Additionally, you are forgoing the ability for your retirement account, and the earnings on your contributions, to generate additional earnings. Remember: You can finance education costs through student loans, but you can’t finance your retirement. Check with your financial professional or plan administrator for more information.

Home Equity:

Although home equity loans and lines of credit come with advantages, you need to understand the risks, especially if you are using these funds for reasons other than building your home’s equity. The most important one is that if you default, you could be putting your home at risk. Both home equity loans and lines of credit are secured by your home. So, before you make a final decision, make sure you have realistic plans for paying back what you borrow.

Managing Student Loan Debt

For many, student loan debt seems to go hand-in-hand with higher education. While taking on some level of student loans may be necessary to cover educational expenses, you should be realistic about how much is actually needed to cover educational expenses. Also seriously consider at the same time what your pay-off strategy will be. Do this long before the loans come due.

Paying off student loans is a financial obligation just like any other debt. If you have student loan debt or are helping a loved one manage their debt, the long payoff terms that come with most of these loans may seem like you will be repaying them forever. It’s not uncommon for people in their 30s and 40s to still be paying on their student loans.

One surefire strategy for seeing your way to “paid-in-full” status is setting a budget and sticking with it. Try to aggressively pay off these loans by paying more than the minimum each month. To do this, look through your household expenses and determine if there’s any nonessential expenses that can be tabled until you get these payments under control and paid off. Even $25 more a month can shave months and even years off substantial loan balances.

Paying off student loans also allows you break ties with your financial past. Put that debt in the rearview mirror. The sooner you can pay off student loans, the sooner you will be able to direct those dollars to your financial future. Reallocating the dollars used for student loan repayment to your long-term goals, including retirement preparation or saving for your own child’s education costs can develop solid financial habits and help you to stay focused on your financial future.


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