Whether your child was just born yesterday (congratulations!) or you blinked and suddenly your child is in middle school, chances are college savings plans have crossed your mind. And with high school graduation season upon us, you might find yourself wondering how in the world you’re going to help pay for their college education, or if the savings program you already have in place is going to be enough. Our online college savings calculator is a good place to start, but what else should you be factoring in?
Luckily, there are several options for college education funding, and ECCU Wealth Management’s Cory DenUyl shares the pros and cons of each in our College Savings series. First up – Cory sheds some light on 529 Plans and Prepaid Tuition Plans.
Perhaps one of the most well-known college savings plans, a 529 Plan is operated by a state or educational institution and managed by a leading financial services provider. Michigan’s 529 plans include Michigan Education Savings Program (MESP) and MI 529 Advisor.
- The parent or grandparent is the owner. This means you can choose the beneficiary, and you have control over contributions and disbursements.
- Funds are not counted for financial aid. When it comes time to apply for financial aid, the balance in your 529 plan is not a contributing factor.
- Low minimum contributions. Not only is it easy to open a 529 plan, but it’s super affordable. With the MESP, the minimum contribution is between $15 and $25 per beneficiary. (source)
- No income limitations. No minimum income required! Just the aforementioned low minimum monthly contributions.
- Tax advantages. Michigan 529 plans offer a state tax deduction on contributions up to $5,000 for single filers and $10,000 for joint. Contributions and any earnings used to pay for qualified higher education expenses are federal and state income-tax free. Consult Cory or your tax advisor for specific tax advice.
Things To Consider:
- Funds must be used for college. If your beneficiary does not attend college, they can be transferred to a qualified member of the family (e.g. spouse, sibling, parent, cousin, or niece/nephew.)
- Can usually only change investments once per year. While it may not be an issue for some, it is something to consider in the event of financial hardship.
- Most 529 Plans are mutual funds. Thus, no guarantees.
Prepaid Tuition Plans
Michigan’s prepaid tuition plan is the Michigan Education Trust (MET) and is a form a 529 plan. What makes this different is that it allows for the pre-purchase of college tuition at any Michigan public university or college based on today’s rates, for a child residing in Michigan. Surely you’ve heard their slogan: “Get Set With MET!”
- Growth keeps up with inflation. You don’t have to worry about investment performance, since performance is often based upon tuition inflation. (source)
- It’s ok to take a year (or more) off. Beneficiaries have 15 years to use tuition benefits upon high school graduation.
- Tax advantages. Contributions are exempt from Federal and Michigan income tax as long as they are used for education. Plus, the amount paid for a contract from a taxable income may be deducted from Michigan income tax. As always, consult Cory or your tax advisor for specific tax advice.
Things to consider:
- Funds cannot be used out of state. State-run plans must be used at in-state public colleges to experience their full value. So, if you’re not sure your child will stay in Michigan during their college years, this may not be the best option.
- Room and board are not covered. Only tuition and mandatory fees are covered with prepaid tuition funds. While this does cover a good chunk of college fees, you will need to find alternate methods of payment for room and board.
- Refunds don’t include interest. If the student does not wish to attend college, the money can be refunded. However, while you usually are refunded the principal, you will get back little to no interest.
Whether you have a lump sum to invest or want to add to a college savings plan monthly, I can help weigh your options and explore a variety of savings possibilities. Meetings are always free for ECCU members…schedule one today or shoot me an email with your questions.
Our next post will cover the pros and cons of Coverdell Plans and UTMA & UGMA Custodial Accounts. Be sure to sign up for our weekly blog updates so you don’t miss it!