Using an IUL to Fund College: What California Parents Should Know

Using an IUL to Fund College: What California Parents Should Know

Maria remembers the exact moment reality set in. Her daughter had just been accepted to UC San Diego, and the financial aid package arrived three weeks later. Despite a household income that disqualified them from meaningful grants, the expected family contribution was $47,000 for the first year alone. The 529 plan she had contributed to for twelve years covered barely two semesters.

Across California, from Rancho Cucamonga to Chino Hills, parents are discovering that the college funding strategies their parents used simply do not work in today's educational economy. The numbers tell a sobering story that keeps many families awake at night, calculating and recalculating whether their children's dreams remain achievable.

The Numbers That Changed Everything

According to Sallie Mae's annual How America Pays for College report, undergraduate families spent an average of $30,837 on higher education during the 2024-25 academic year, representing a 9% increase from the previous year. For families earning $150,000 or more annually, 87% relied on parent income and savings to cover costs, contributing an average of $15,754. The College Board reports that published tuition and fees at private nonprofit four-year institutions reached $45,000 for the 2025-26 year, while public four-year out-of-state tuition hit $31,880.

A Citizens Financial Group survey revealed what many parents already suspected. While 59% of parents felt confident about managing college expenses when their child was accepted, that number plummeted to just 21% once actual tuition bills arrived. Chris Ebeling, head of student lending at Citizens, described this as a growing confidence gap that catches families off guard despite years of planning.

Too Rich for Aid, Too Stretched to Pay

Bloomberg's analysis of financial aid data from 50 selective colleges illuminated what many middle-class families experience firsthand. At approximately $150,000 of pre-tax household income, families are expected to contribute roughly 20% of their income, about $30,000 annually, toward tuition. Those earning $270,000 face expected contributions of $61,000 per year. Most schools eliminate financial aid eligibility entirely at about $400,000 of income.

"The financial aid system ignores the reality of many people's financial situation," noted one parent whose family earned too much to qualify for meaningful aid but found themselves unable to afford a selective private university without significant sacrifice. This sentiment echoes across countless dinner tables in California communities, where parents weigh retirement security against educational opportunity.

What Real Families Are Saying

"When my boys grew concerned about how we would afford to send them to college, I reassured them that we would figure it out. As junior year approached, the pressure swelled," shared one mother navigating the process as a single parent. Her experience reflects the emotional weight parents carry, trying to balance encouragement with honest conversations about financial limitations. The gap between reassurance and reality often widens as acceptance letters arrive.

Natarajan, an IT services consultant, described using a 529 account, depleting savings, and even tapping his 401(k) to help his sons pay for school. With fewer financial resources remaining, he expressed worry about managing expenses in the years ahead. His situation represents the cascading effect of college costs on broader family financial security.

Why Traditional Savings Fall Short

The average 529 account balance nationwide stood at $30,295 as of mid-2024, according to education savings statistics. While 529 plans offer tax-advantaged growth and tax-free withdrawals for qualified education expenses, they come with limitations that concern some families. Funds must be used for education-related costs, or gains become subject to ordinary income tax and potentially a 10% penalty. Additionally, 529 assets may be included in financial aid calculations, potentially reducing the assistance a student qualifies to receive.

"I'm putting a small amount in my daughter's 529 plan every month, but if it ends up being able to pay for a semester or two of even a public university, I'd be surprised," admitted one parent whose experience mirrors that of millions. The mathematical reality confronts families with an uncomfortable truth: starting early and saving consistently may still leave them significantly short of their goals.

When Plans Change and Flexibility Matters

According to CIRP's American National Norms research, 75% of students get accepted to their first-choice college. However, among those students, 62% reported they could not afford to attend. This disparity between acceptance and enrollment creates emotional strain for entire families, who must navigate disappointment while pivoting to more affordable alternatives.

The 2024 SECURE 2.0 Act introduced a provision allowing unused 529 funds to be rolled over into a Roth IRA for the beneficiary, subject to a $35,000 lifetime limit and annual IRA contribution caps. This flexibility represents progress, but many families seek funding approaches that offer broader options from the outset, particularly given how unpredictable life paths can be.

Exploring Dual-Purpose Financial Strategies

Research from DePauw University compared indexed universal life policies with 529 college saving plans through Monte Carlo simulations and sensitivity analysis. The study found that IUL policies showed different return and risk profiles compared to various 529 portfolio allocations. Importantly, the researchers noted that the expected family contribution impact should be considered in the decision-making process, since IUL cash values are not typically included in financial aid analysis.

SmartAsset's comparison of these approaches highlighted how each serves different purposes. While 529 plans are specifically designed for education savings with corresponding tax benefits, IUL policies provide both a death benefit and a cash value component. The cash value grows tax-deferred and can potentially be accessed through policy loans or withdrawals for any purpose, including education expenses, without the restrictions that govern dedicated education accounts.

Understanding How Assets Affect Aid Eligibility

According to Pennington Law's analysis of education planning options, assets held in life insurance vehicles, including IUL policies, are typically not included in financial aid calculations. This distinction matters significantly for families whose income places them near the threshold where every counted asset reduces potential assistance. The more assets reported on financial aid applications, the higher the expected family contribution becomes.

Northwestern Mutual's 2024 Planning and Progress Study found that among American parents saving for their children's college education, 95% expect to cover more than half of the costs. About one in three plan to pay the full amount. For these families, the structure of their savings vehicles can meaningfully impact both their contribution capacity and their children's aid eligibility.

Finding the Right Path Forward

Every California family's situation differs, shaped by income levels, the number of children, time horizons until enrollment, and competing financial priorities like retirement savings and emergency funds. What works for a family in Ontario may look different from the approach that makes sense for parents in Chino Hills. The key lies in understanding the full range of options and how each aligns with both immediate goals and long-term security.

For families exploring how indexed universal life insurance might fit within their college funding and family protection strategy, working with a knowledgeable professional helps clarify the benefits, costs, and considerations specific to their circumstances. Young Douglas Insurance assists California families in evaluating how life insurance products can serve multiple financial goals, from education funding flexibility to legacy protection. Understanding your options today creates clearer pathways for your children's opportunities tomorrow. Request a life insurance consultation to discuss how your family's unique situation might benefit from an integrated approach to education funding and financial protection.

SOURCES:

  • Sallie Mae. "How America Pays for College." 2024-25 Report.
  • College Board. "Trends in College Pricing and Student Aid." 2024-25.
  • Citizens Financial Group. College Confidence Survey. 2025.
  • Bloomberg. "Top US College Costs Squeeze Middle Class." April 2025.
  • CNBC. "Paying for College Gets Increasingly Difficult." August 2025.
  • Northwestern Mutual. "2024 Planning & Progress Study." May 2024.
  • DePauw University. "College Educational Planning: IUL vs 529 Plans." 2019.
  • SmartAsset. "529 Plans vs. Indexed Universal Life Insurance." April 2025.
  • Education Data Initiative. "College Saving Statistics." January 2025.

DISCLOSURE: This article is for informational purposes only and does not constitute financial or legal advice. Life insurance policies have fees and charges, and policy loans reduce cash value and death benefit. Consult with a licensed financial professional to determine if IUL is appropriate for your situation. Young Douglas Insurance is a Farmers Insurance agency serving California.

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