By Heather Barthelmes, Analyst, Michigan Education Trust (MET)
May 1, 2019
Parenting is all about balance. You must balance how many sweet treats you give your child versus how many vegetables they eat. You balance how much screen time they get versus how much outdoor play. You even balance their wants and needs with your wants and needs. So, why wouldn’t paying for things like their future college education require some balance as well?
You may have heard about 529 savings plans, but have you heard about 529 prepaid tuition plans? Prepaid tuition plans like the Michigan Education Trust (MET) allow the prepurchase of college tuition based upon today’s tuition rates. When the child reaches college age, the plan pays out at tuition rates at that time. There are currently 13 prepaid tuition plans (offered by 12 states and one not-for-profit organization). These plans give parents peace of mind knowing they have college tuition paid for regardless of how the stock market performs or how high the price of college rises.
However, tuition is just one part of the college bill. Parents must also consider how to pay for room and board, books, computers and other expenses. Most 529 prepaid tuition plans don’t directly cover these types of expenses. So, it can be a good idea to diversify your college savings portfolio between a prepaid plan and a savings plan. Savings plans are different because account earnings are based upon the market performance of your investment options. These plans are also able to directly pay for any qualified higher education expense including tuition, room and board, books, fees, etc.
The great thing about both types of plans is that they both can offer tax-deferred growth and tax-free withdrawals for qualified expenses. Michigan offers its residents a tax deduction on contributions into any Michigan 529 plan, both prepaid and savings. If residents contribute into both types of plans, they can take deductions on both. Besides Michigan, over 30 other state college savings plans that offer state income tax credits or deductions for matching contributions to their 529 programs.
Having a balanced college savings portfolio, which includes a 529 prepaid tuition plan as well as a 529 savings plan, can help you achieve your college savings goals.
About the Author
Heather Barthelmes is an analyst for the Michigan Education Trust (MET). Since 1988, more than 109,000 MET contracts have been purchased, and today more than 12,300 students are using their MET benefits at Michigan public colleges and universities, private colleges and out-of-state institutions.