My daughters and I recently played the board game Life® and faced the proverbial question: college or no college? My children are in fifth and third grades this year, and I was startled to realize that this generation heads off to college in eight short years! As a financial advisor, I wondered, how many parents have started planning for these future costs?
According to savingforcollege.com, the current average tuition expense for a four-year degree at a public institution in the U.S. is estimated to be about $38,000 – but room and board doubles that expense. As well, the average annual tuition increase over the past ten years has been about 5% per year. Therefore, college will cost roughly $56,000 in 2022 – room and board could increase that total to $100,000.
Unless your child is an uncanny athlete, musical savant or engineering prodigy, we parents need to start saving! First, decide how much you are willing to cover. I believe it reasonable to pay up to 50% and let your student claim some ownership of their education through work, loans, or savings of their own. Incentives are also a great idea: “all As” for all four years results in all debt paid off by mom and dad. But how do you cover your part? Here are a few viable options:
Michigan Education Savings Plan 529
You have two choices: buy directly from TIAA Cref or invest through an advisor. Both options allow for tax-free withdrawals for qualified higher educational expenses. The rate of return will vary and there are no guarantees of keeping up with tuition rates, but it allows for flexible contributions. Although the two options are similar, investing through an advisor may incur sales commission fees.
The Michigan Educational Trust – MET
Through this program, you can buy semesters at today’s prices for future attendance. Your purchase is guaranteed to be honored, as long as your child attends a Michigan public university. On this plan, you commit to a number of semesters and are given a monthly amount to save, or you can choose a onetime payment option. The latter requires a sizeable deposit upfront, but guarantees your cost is contained at today’s college tuition rate.
Please note that both of the options listed above can be transferred to blood relatives, but if the funds are not used for college, there will be penalty and gains tax. For more information regarding college planning, please consult IRA Publication 970 (Tax Benefits for Education). Any of the choices discussed therein should be carefully evaluated by you in conjunction with your tax advisor.
I think those numbers have taught us that it is never too early to start preparing for college! Let me encourage you to examine all your college planning options and the unique benefits of each. I am confident you can find a plan that fits your family.
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