HOW JACK & DIANE CUT THEIR COLLEGE COSTS FROM $240,000 DOWN TO $60,000 AND SOCKED AWAY OVER $1,000,000 FOR THEIR RETIREMENT.

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USE THIS STUDENT LOAN FORGIVENESS STRATEGY TO CUT YOUR CLIENT’S COLLEGE COSTS BY MORE THAN HALF AND GET A LIFE INSURANCE SALE!

I recently completed the Certified Student Loan Advisors Board of Standards coursework and certification test and received their prestigious CSLP® designation mark. This rigorous CSLP® course and certification has been a goldmine for me to show financial professionals who want to help their middle to upper-income clients dramatically cut their cost of college.

Today, I’m going to demonstrate a unique case study using Parent PLUS loans and a couple of loopholes in the government loan forgiveness programs to actually cut the cost of a client's children’s college education in half, or even more, and put that savings back into their retirement.

CASE STUDY - HOW JACK & DIANE CUT THEIR COLLEGE COSTS FROM $240,000 DOWN TO $60,000 AND SOCKED AWAY OVER 1 MILLION FOR THEIR RETIREMENT.

Jack & Diane are both 45 year- old corporate employees and their combined earned income is currently $180,000. Jack earns $110,000 and Diane earns $70,000. Their income is expected to inflate at 3.0% per year. Jack & Diane have both contributed $6,000 each year into their 401k since age 23, and now at age 45, they have a combined $479,400 in their 401k accounts.

As parents, they plan to send their 2 sons to a nearby in-state college. Their oldest son, Max, is a sophomore in high school, and their youngest son, Sam, is a 7th grader. Estimated future college costs are $115,000 for Max and $125,000 for Sam for a total of $240,000.

Jack and Diane plan to save $1,550 a month into their state 529 plan at a 5% growth rate for the next 10 years to pay the $240,000 bill for college. However, to save that much money, one of them will be forced to stop contributing $6,000 a year to their retirement until age 55. This will cost them a total of $127,900 in lost retirement money when they retire at age 65. As a result, Jack & Diane’s real cost of college will be $367,900 ($240,000 + $127,900).

USING HIGH-COST PARENT PLUS LOANS AND 2 LITTLE-KNOWN LOOPHOLES TO CUT COLLEGE COSTS

Our strategy would be to use the Parent PLUS loans to pay for the entire college cost of $240,000 and DEFER the payments on those loans for the 10 years until their last son graduates.

After the second child graduates in 10 years, when Jack and Diane are both 55 years old, the total capitalized costs of the PLUS loans in deferment and forbearance will total about $313,000, an extra $73,000 more than the actual cash cost of $240,000. Monthly payments on these PLUS loans using the STANDARD repayment plan over the next 25 years will be around $2,313, and the interest expense will be $366,000.

Right now you’re probably thinking, “How can you possibly use 7% PLUS loans with a 4%+ origination fee to CUT COLLEGE COSTS?” Below are the steps.

STEP1: First, we would have Diane put the PLUS loans in her name ONLY because of her lower income. Diane will have no problem qualifying for the PLUS loans because she has excellent credit and has no adverse credit history.

STEP 2: After both students graduate, we have Diane split the $313,000 in Parent PLUS loans into two Direct Consolidation loans, one for each son. Now Diane’s Direct Consolidation loans qualify for the 20% Income-Contingent Repayment Plan.

STEP 3: Next we will use Loophole #1 and have Jack & Diane’s CPA file their taxes as Married Filing Separate (MFS). Now only Diane’s income will be used in the calculation of the Income-Contingent Repayment Plan and her lower-income will yield a lower monthly payment of $560/month instead of the original $2,313/month under the original STANDARD repayment plan.

STEP 4: Is to use this other little-known loan loophole called the double consolidation. We will now have Diane consolidate both consolidation loans into one consolidation loan or a DOUBLE-CONSOLIDATION. Now Diane is no longer subject to the rule restricting Direct Consolidated loans from repaying Parent PLUS loans because the one Consolidation loan is now repaying the two previous Consolidation loans.

As a result, Diane can elect to use the 10% Pay As You Earn (PAYE) repayment plan, further lowering her payment to ONLY $252/month for 20 years, ending at age 75. This double consolidation strategy with loan payments of $252/month over 20 years yields an actual cash outlay of only $60,500 for two college educations that would have cost Jack and Diane $240,000 if they had used the 529 plan to pay for college. In other words, Jack and Diane will end up paying only 25% of the original $240,000 cost.

THE GOVERNMENT GIVETH… AND THE GOVERNMENT TAKETH AWAY!

But, if the federal government is going to forgive 75% of Jack & Diane’s college costs, then the IRS will want them to pay taxes on that forgiveness. And the lower your monthly payments are on these government loan repayment plans, the larger the dollar amount of loan forgiveness you’ll end up with. After 20 years when the monthly payments stop, the government will send you a 1099-C, notifying the IRS of the amount of your loan that was canceled or forgiven. Immediately upon receiving this 1099-C, the IRS will issue you a tax bill.

In Jack and Diane’s case, they will both be 75 years old and well into retirement when they make their last payment and receive that tax bill. And because they only paid $252/month for their loan over 20 years, Jack and Diane will end up with loan forgiveness of $686,100. This large amount of loan forgiveness will be added to the income they earn that year, which will drive up their tax rate up to the highest federal level of 37% plus state tax of 7% for a total tax rate of 44%. As a result, they’ll get a huge tax bill from the IRS of about $301,900 for the loan forgiveness.

HOW WILL JACK & DIANE PAY THIS LARGE TAX BILL WHEN IT BECOMES DUE? SHORT ANSWER… CASH VALUE LIFE INSURANCE

Jack & Diane’s original college funding plan was to invest $1,550/month into a 529 college savings plan. Since they used PLUS loans to pay for college, we had them instead, put that $1,550/month into a cash value IUL policy and use that money for their retirement. The reason we put the money into an IUL cash value life insurance policy is for the safety and complete control of the money. Now when the IRS comes knocking in 20 years we are sure the money will be there and not subject to the ups and downs of the stock market, like a 401k.

The particular IUL life insurance policy we use is specially designed to keep the life insurance at a minimum and the cash value build-up at a maximum. Over those 30 years (age 45 to 75) the cash value grows in the IUL policy to $1,386,641.

If Jack & Diane need to access that money for emergency needs, they can easily borrow from the cash value completely tax-free with no fees or penalties, unlike their 401k where they could not access the money without large penalties and fees. And if Diane dies during those 30 years, there’s even more money as a death benefit for Jack to pay the IRS loan forgiveness tax bill, which will eventually be forwarded to their estate.

In summary, using this strategy, Jack & Diane educated both of their children for 25% of the actual cost and the Federal government forgave 75% of the cost. They paid off their enormous tax bill due at the end of the loan for all that forgiveness, and they were able to add $1.08 million ($1,386,641 - $301,900) for their retirement.

I have been putting together more powerful strategies like these for our members and our team here at the Association of Certified College Funding Specialists will be adding extra presentations and marketing funnels to the CCFS® Toolbox with these new loan strategies. If you haven’t been using the CCFS® Toolbox, I encourage you to login into your account and add it to your membership subscription today. I promise you won’t regret it.

Posted by Ron Them

For over 30 years, the nation's leading financial advisors, broker/dealers, and major media outlets have been using his research, funding strategies, training, and insight. Ron is highly regarded as an expert in the college funding field.

He is a former Chief Financial Officer of a Fortune 500 company and currently owns his own financial advisory company specializing in cash flow planning for business owners and executives. He developed the Cash Flow Recovery™ process that uses cash flow management principals to increase asset value and build wealth for business owners.

He is also the originator of several software calculators to help advisors and families make college affordable, including:

* College QuikPlan EFC Calculator
* "Find the Money" College Cash Flow Calculator
* College Debt Reduction Calculator

Ron has been quoted in U.S. News and World Report, Kiplinger's Personal Finance, Smart Money, Financial Advisor Magazine, Small Firm Profit Report, Practical Accountant, LIMRA's Market Facts, Senior Advisors Magazine, HR Magazine, BenefitNews.com, Employee Benefit News Magazine, ProducersWeb.com, Entrepreneur Magazine, Insurance Selling Magazine, CollegeNews.com, The Christian Voice, and Columbus CEO Magazine.