How Michiganders Can Save for Their Kidsí College
How Michiganders Can Save for Their Kidsí College
Many families find the thought of saving for their kids’ future college costs daunting, if not impossible. According to a study by Sallie Mae, only 36% of middle-income families and 29% of low-income families are putting money away for their kids’ college expenses. And most of these families fail to meet their saving’s goal.
One of the reasons families fail to meet any kind of college saving goal is because they don’t know where to start. So, we’re going to explore several options offered to Michigan families who want to save for their children’s future education, even if they have a tight budget.
The following options are all classified as 529 college saving plans, sometimes called a Qualified Tuition Programs (QTMs). The number “529” refers to the Internal Revenue Service (IRS) code for college savings plans.
In general, 529 plans work by investing after-tax money into an account, either established directly with the state or through a third-party agent. The funds, plus any investment gains, are then withdrawn to use toward qualified education expenses when the child enters college. Although there are yearly and maximum contribution limits, they are higher—and therefore you can save more money—than Roth IRAs, another option for saving towards college expenses.
Be sure to review the annual fees, operating costs, and other fine print before setting up an account.
Michigan Education Trust (MET)
An MET is a Michigan 529 prepaid tuition plan administered by either the state or a higher education institution. Prepaid tuition plans work by parents (or other contributors, like grandparents, family friends, etc.) pre-purchasing tuition based on today’s rates that will be paid out at whatever the future cost will be when the child starts college. MET contracts can be purchased by semester, year, or credit hour, up to five years (or 10 semesters).
Here’s an example of how it works: Say tuition at Perfect College for Me (PCM for short) is $10,000 a year when a $5,000 contribution is made to a child’s MET. That contribution will buy 50 percent of one year’s tuition whenever the child attends PCM and withdraws from their MET. So, if tuition skyrockets to $20,000 when the child enrolls, that $5,000 investment will be worth $10,000 in tuition—in other words, still 50 percent of the bill.
There are some details you should keep in mind. If your child decides not to attend an accredited college or university, monies are refunded to plan contributors. Or, the benefit of the plan may be transferred to a sibling or first cousin. This can also be done if the child receives a full scholarship. If your child attends a private Michigan or out-of-state school, a refund of the plan’s total can be directed to the school. Students have 15 years to use the tuition benefits of their MET.
Starting an MET can be done online and for as low as $14 per month. Your employer may offer a payroll deduction for MET contributions, so be sure to ask. Automated deductions always help grow saving plans.
Contributions up to $5,000 per year by an individual, and $10,000 by a married couple filing jointly, can be deducted from your Michigan state income tax. Any prepaid tuition earnings are tax-exempt when the funds are used for higher education costs.
Michigan Education Savings Program (MESP)
An MESP is a Michigan 529 college savings plan. An MESP account grows not only through contributions, but also through the market performance of the underlying investments, which are usually mutual funds. They are sponsored and administered by the state. Like an MET, other family members besides parents, as well as friends, can contribute to an MESP.
Beneficiaries can use the funds at any participating public or private college or university nationwide—and even some abroad—to pay for IRS-designated qualified higher education expenses, including enrollment fees, certain room and board costs, books, supplies, certain computer and technology expenses, and Internet-access fees.
Earnings grow free from federal tax and offer a variety of low-cost investment options, including age-based, multi-fund, and single-fund. You can open an account online in about 15 minutes and with as little as $25 per investment option or $15 per pay period using payroll deduction.
The same state income tax deductions apply to an MESP as they do to an MET.
MI 529 Advisor
The MI 529 Advisor plan is the newest college savings plan, established in 2009. It’s similar to the MESP, however it includes 20 investment options. This wider variety gives investors more control over how aggressively or conservatively they invest. These options can also be changed throughout the lifetime of the account.
The MI 529 Advisor plan is state run, in conjunction with Allianz Global Investors Distributors and TIAA-CREF Tuition Financing, Inc.