The only thing certain is death and taxes, you say? I say it is the rising cost of college. Tuition costs have grown exponentially, by some counts as much as four times the rate of inflation over the last 25 years. So parents-to-be should be stashing away for college almost as soon as that gleam in the eye becomes a reality.
States across the union have established various tax-advantaged ways (529 plans) in which to save for your child’s college education. But like everything else, there are choices and some confusion about which plan is best for you. Below is a summary, but additional information is available at www.misaves.com, or www.savingforcollege.com, among others.
Prepaid versus Flexible Plans
Prepaid plans like the Michigan Education Trust (MET) allow you to buy college credits at today’s cost. Your child uses those credits to pay for college regardless of what it costs when they actually enroll. Too good to be true? The catch is that you are restricted to your state’s public universities or community colleges. Credits that go unused (if, for example, your child decides to go find himself, rather than enroll) can be transferred to siblings or first cousins. If your child chooses to go out of state or to a private college, you can use a plan refund to offset those costs.
Flexible plans like the Michigan Education Savings Plan (MESP) allow you to save for college and apply those dollars to any qualified institution, public or private, in any state. Savings can be applied to tuition, room, board, books, supplies, and equipment. Unused assets can be transferred to offset education expenses of other family members.
Advantages
Anyone can contribute to a 529 plan and get a state tax deduction (within established limits). Contributions to a child’s savings plan are a gift that keeps giving long after they have outgrown toys or trinkets. Earnings accumulate tax-free and withdrawals are tax free if used for qualified expenses.
There are various providers of 529 plans, but state-sponsored plans are often the lowest cost option. You may also need to make some investment choices, but if you are not sure, using the age-based option is a good alternative for your child.
The important thing is to get started early. To quote Benjamin Franklin: “All things are cheap to the saving, dear to the wasteful”.
Ina Fernandez CPA is Managing Director of Liberty Capital Management, Inc.