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College tuition bills are due. Now what?

Consider if borrowing could help pay for education expenses

 

Paying for a college education can be one of the most challenging financial goals facing families today. While the cost of attending public universities can be substantial, private colleges can cost upwards of $50,000 per year, according to the College Board.1 Before your child enters college, you need to know how you’ll make those large payments.

 

If you have time before those tuition bills come rolling in, you should consider using a Section 529 Plan to save for future education expenses. Section 529 Plans are one of the best ways to save for qualified education expenses for a designated beneficiary because of their tax advantages and ability to grow over time.2 And if you have a Bank of America® Premium Rewards® credit card, you can boost your 529 savings by redeeming your points for credit to an eligible Merrill investment account including 529 accounts.3

 

While you can save for your child’s education expenses, if you haven’t saved enough, you and your child may need to combine savings, borrowing, and potentially financial aid, grants and scholarships, if your child is eligible. Consider how you’ll do that. For example, if savings will cover only two years of expenses, will you use those funds to pay for the first two years or the last two? Or, will you spread your savings over all four years and borrow each year to cover the remaining expenses?

 

College loans are available to the student but can take many years for them to repay. If you don’t want to leave your student burdened with debt when they graduate, consider if your borrowing could be an additional tool to help pay for educational expenses. Speak with your advisor about the suite of potential credit solutions available, which may include the following:

 

Home Equity Line of Credit (HELOC) If you have equity in your home, a HELOC from Bank of America can be a flexible solution for covering education expenses.
  • Draw as much or as little as you need as tuition bills come due, up to your available credit limit.
  • Pay tuition and send money to your child with same-day transfers from your HELOC to your Bank of America accounts.

 

You should consider all the benefits, as well as the risks. Please see below.

   
Loan Management Account® (LMA® account) You can borrow against the value of your eligible assets held at Merrill when you need to cover upcoming tuition and other expenses.
  • Using your eligible investment assets as collateral can give you convenient access to borrowed funds, all while helping you keep your investment strategy on track.
  • Opening an LMA® account is fast and simple, taking only three to five business days.
  • Pay tuition easily with LMA convenience checks, free wire transfers or through your Bank of America checking account.
  • Benefit from highly competitive interest rates and flexible repayment options to coincide with your cash flow situation.

 

You should consider all the benefits, as well as the risks. Please see below.

 

Your advisor can provide personalized solutions to address your needs, depending on your circumstances.

Risks & Considerations

LMA account

Securities-based financing involves special risks. Clients should review their LMA Loan Agreement and related documents and disclosures carefully and consult with their own independent tax and legal advisors.

The risks to consider include:

  • A decline in the value of collateral assets may require the client to provide additional funds or securities to avoid a collateral maintenance call. Clients can lose more funds than are held in the collateral account. The LMA account is a full recourse loan and the account holder will be liable for any deficiency.
  • Bank of America can force the sale or other liquidation of any securities or other investment property in the collateral account and, unless otherwise required by law, can do so without first contacting the account holder.
  • The account holder is not entitled to choose which securities in the collateral account are liquidated or sold.
  • The Bank can change its collateral maintenance requirement at any time without notice to clients.
  • Clients are not entitled to an extension of time to satisfy the Bank’s collateral maintenance requirement.
  • There may be adverse tax or other consequences to clients if securities are sold or otherwise liquidated by the Bank.
  • The LMA account is an uncommitted facility, although loans to individuals and trusts may be committed in an amount not to exceed $100,000. The Bank may demand full or partial repayment at any time, and any commitment may be immediately terminated.
  • For fixed-rate advances and term loans, principal payments made in advance of the end of the applicable fixed-rate period, whether voluntarily or involuntarily (due to demand or liquidation by the Bank), may be subject to a substantial breakage fee, as determined by the Bank.
  • Some restrictions on the use of LMA account proceeds may apply under the terms of loan documents and applicable laws and regulations. The LMA account cannot be used to purchase marketable securities unless specifically agreed by the Bank.

 

HELOC

  • Interest rate risk – As a variable-rate loan, interest rates and payments can change. Clients should carefully consider these risks before borrowing.
  • Potential repayment volatility – For clients who opt for an initial interest-only period, at the end of this period, they will still owe the original amount borrowed, and the monthly payment will increase significantly and may result in "payment shock" — even if interest rates stay the same. If clients want to make interest-only payments, discuss what the payments will be after the end of the interest-only period.
  • HELOCs take a security interest in your home, so a default on the HELOC could result in the loss of your home.

1 College Board: Trends in College Pricing and Student Aid 2020. https://research.collegeboard.org/pdf/trends-college-pricing-student-aid-2020.pdf

 

2 To be eligible for favorable tax treatment afforded to the earnings portion of a withdrawal from a section 529 account, such withdrawal must be used for "qualified higher education expenses," as defined in the Internal Revenue Code. The earnings portion of a withdrawal that is not used for such expenses is subject to federal income tax and may be subject to a 10% additional federal tax, as well as applicable state and local income taxes. The additional tax is waived under certain circumstances. Qualified higher education expenses include: tuition, fees, supplies and equipment required for enrollment or attendance of the beneficiary at an eligible educational institution, certain room and board expenses, special needs services incurred in connection with enrollment or attendance at an eligible educational institution, and computers or peripheral equipment, computer software, or internet access and related services. The beneficiary must be attending an eligible educational institution at least half time for room and board to be considered a qualified higher education expense, subject to limitations. Institutions must be eligible to participate in federal student financial aid programs to be eligible educational institutions. Some foreign institutions are eligible. You can also take a federal income tax-free distribution from a 529 account of up to $10,000 per calendar year per beneficiary from all 529 accounts to help pay for tuition at an elementary or secondary public, private or religious school.  Qualified higher education expenses now include expenses for fees, books, supplies, and equipment required for the participation of a beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under the National Apprenticeship Act and amounts paid as principal or interest on any qualified education loans of the beneficiary or sibling of the beneficiary, up to a lifetime maximum of $10,000 per individual. Distributions with respect to the loans of a sibling of the beneficiary will count towards the lifetime limit of the sibling, not the beneficiary.  Such repayments may impact student loan interest deductibility.  State tax treatment may vary for distributions to pay for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school, apprenticeship expenses, and payment of qualified education loans.

 

3 Bank of America® Premium Rewards® Program Information. How You Earn Points: You earn points when you use your card to make purchases, minus returns, credits and adjustments (“Net Purchases”). The following transactions are not considered purchases and will not earn points: Balance Transfers and Cash Advances (each as defined in your Credit Card Agreement), fees, interest charges, fraudulent transactions and certain other charges. Unlimited 1.5 Points: Earn 1.5base points for every $1 of Net Purchases (non-Travel and Dining) charged to the card each billing cycle. 2 Points: Earn 2 base points for every $1 of Net Purchases made with the card in the Travel and Dining category, with no limit on the number of points you can earn. Travel and Dining Category: Dining includes Restaurants, including Fast Food, and Drinking Establishments, such as Bars or Taverns. Travel includes: airlines, hotels, motels, timeshares, trailer parks, motor home and recreational vehicle rentals, campgrounds, car rental agencies, truck and trailer rental, cruise lines, travel agencies, tour operators and real estate agents, operators of passenger trains, buses, taxis, limousines, ferries, boat rentals, parking lots and garages, tolls and bridge fees, tourist attractions and exhibits like art galleries, amusement parks, carnivals, circuses, aquariums, zoos and the like. Purchases from some merchants that provide travel-related goods and services will not be eligible, like in-flight goods and services, and duty-free airport purchases. Travel and Dining Category Processing: Merchants are assigned a merchant category code (MCC) based on the merchant’s primary line of business. We do not determine which MCC a merchant chooses to classify itself. We group similar MCCs into Categories to help you earn rewards on purchases made at specific merchants. Your purchase may not qualify to receive the Travel and Dining Category earn rate if the merchant does not process transactions under the MCC that corresponds with the Travel and Dining Category, or your purchase is processed through a third-party payment account, mobile/wireless card reader, digital wallet not supported by Bank of America or similar technology where the technology does not support transmission of MCCs. For those Net Purchases, you will earn 1.5 base points per $1. Not all merchants accept all credit cards. How You Use Your Points: When your points balance is 2,500 points or more, you can redeem your points for cash rewards, including a statement credit, an electronic deposit into a Bank of America® checking or savings account, or for credit to a qualifying Cash Management Account® with Merrill or qualifying 529 account with Merrill. Points may also be redeemed for travel at the Travel Center, or gift cards. Cash rewards shall be issued for a U.S. dollar sum and may be requested on demand. Each point redeemed is worth $0.01 (2,500 points = $25). Points Expiration: As long as your account remains open with active charging privileges, points do not expire. Points Forfeiture: If the owner(s) of the card account voluntarily closes the card account, or if for any reason we close the card account, any unredeemed points associated with the account are subject to immediate forfeiture, unless specifically authorized by us. Rewards Program Rules: Program Rules containing additional terms of your credit card rewards program will be sent to you with your new account materials. Other significant terms apply. Program subject to change. 0620RLL.PR.0620

 

The Loan Management Account (LMA account) is a demand line of credit provided by Bank of America, N.A., Member FDIC. Equal Opportunity Lender. The LMA account requires a brokerage account at Merrill Lynch, Pierce, Fenner & Smith Incorporated and sufficient eligible collateral to support a minimum credit facility size of $100,000. All securities are subject to credit approval and Bank of America, N.A. may change its collateral maintenance requirements at any time. Securities-based financing involves special risks and is not for everyone. When considering a securities-based loan, consideration should be given to individual requirements, portfolio composition and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. The securities or other assets in any collateral account may be sold to meet a collateral call without notice to the client, the client is not entitled to an extension of time on the collateral call and the client is not entitled to choose which securities or other assets will be sold. The client can lose more funds than deposited in such collateral account. The LMA account is uncommitted and Bank of America, N.A. may demand full repayment at any time. A complete description of the loan terms can be found within the LMA account agreement. Clients should consult their own independent tax and legal advisors. Some restrictions may apply to purpose loans and not all managed accounts are eligible as collateral. All applications for LMA accounts are subject to approval by Bank of America, N.A. For fixed-rate and term advances, principal payments made prior to the due date will be subject to a breakage fee.

 

Before taking out any mortgage or line of credit, borrowers should consult their tax advisor to understand the implications of each of their options.

 

HELOC funds may not be used to purchase, carry or trade securities or repay debt incurred to purchase, carry or trade securities.

 

Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S” or “Merrill”) makes available certain investment products sponsored, managed, distributed, or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp.”). MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of BofA Corp.

The Premium Rewards credit card program is issued and administered by Bank of America, N.A.

 

Banking, mortgage and home equity products offered by Bank of America, N.A., and affiliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation. Home Icon for Equal Housing Lender Equal Housing Lender.  Credit and collateral are subject to approval. Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice.

 

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