Tim and Rebecca want to send daughter Emma to college at their expense. Their parents did so for them, and they want to do the same in turn.
But it’s a far greater challenge for them thanks to the runaway cost of a college education. Their preferred college costs almost $40,000 today. With three years to go before Emma begins – and a college cost inflation rate near 5%, they’ll spend more than $172,000 returning the favor. That total must be paid on a 4-year timeline – the equivalent of Tim and Rebecca buying a $172,000 house on a 4-year mortgage.

All that assumes Emma graduates from college in 4-years. Statistically, there’s a 54% chance she’ll need a fifth or sixth year to earn her diploma. If that happens, their total cost will quickly rocket past the $200,000 mark. For one kid!

On-time graduation rates have fallen so precipitously because too many colleges are more interested in separating parents from their money rather than revealing that a prospective student may not be the best fit for their brand of college experience. To make matters worse, Tim and Rebecca’s $200,000 household income will disqualify them any need-based financial aid.

This is the predicament of today’s family. And it all hits during what are most parents’ peak earning years – meaning when it’s all said and done, most will be at or close to retirement’s doorstep. The decisions they make about college and how to pay for it will have a monumental impact on their prospects for retirement.

Tim and Rebecca discovered a financial solution called the CROP Plan (College Refund Opportunity Plan) offered by national college planning firm, Strategies for College. The company’s first order of business was to use proprietary software that helps them identify colleges that give Emma the best chance of graduating on time. That puts a cap on the overall cost of her college education. Then, they introduced them to The CROP plan – an intriguing financial strategy that – if all goes according to plan – will reimburse the entire cost of college back to Tim and Rebecca in retirement.

Here’s how it works.
Tim and Rebecca will allocate the money they would have paid for Emma’s college, to a special savings account that protects it from market loss and grows it tax deferred. How will Emma pay for college? Tim and Rebecca will borrow 100% the cost of Emma’s education from either the federal government or private lenders.

On the surface, that might not seem to make sense. Why borrow and incur the added interest cost when they could just pay the college bill outright?

The idea is to take advantage of the college loan deferral period. Repayment of college loans is typically deferred until 6-months after graduation. That time lets their special savings account grow and compound. Even if the interest rate on the borrowed money is greater than the growth rate on their savings account, the compounding affect on saved money is far more powerful than the cost of amortized interest on borrowed money – a financial reality the CROP plan takes full advantage of.

When the bill eventually comes due on the college loans, the bloated balance in the special savings account is used to collateralize a line of credit. The line of credit is then used to repay all the college debt.

Now if that sounds like treading water – trading one debt for another – it is. However, the follow-on line of credit contains a very special provision. The lender does not require that it be repaid during Tim and Rebecca’s lifetime so long as they maintain an adequate amount of relatively inexpensive life insurance to pay the balance at their death – even if that’s not for 50 years or more.
After paying off all the traditional college debt, the balance in Tim and Rebecca’s special savings account continues to grow and compound uninterrupted, and so does the line of credit. Tim and Rebecca can either hold that growing borrowing capacity in reserve for some future need, or they can draw lifetime installments out of it as a source of retirement income. If they do so, those draws come out of the line of credit tax-free since they’re technically borrowed money. For added peace of mind, the life insurance component means the money to send Emma to college is there even if Tim and Rebecca aren’t.

This ‘have-your-cake-and-eat-it-too’ strategy is the ultimate use of OPM (Other People’s Money). Tim and Rebecca use traditional OPM sources (the Federal Government and private lenders) to pay for college; they repay those lenders with a second batch of OPM (their line of credit); and then use their perpetually growing line of credit balance again (still OPM) – to supplement their retirement income – all with no lifetime repayment obligation.

The only ‘true’ cost of the entire strategy is the premium cost for the life insurance – a miniscule fraction of the cost of college.

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