How to pay for college in the fall?

Jan 2013

Scott Whyte, AAMS®, Financial Advisor, Bloom Asset Management

In about a month, my oldest son will be graduating from Troy Athens High School. One of those major milestones that proud parents like my wife and I look forward to and then when it happens we realize it has come along far too fast.

He will be heading off to Oakland University this fall to pursue a degree in engineering and his tuition will be paid for the next four years courtesy of a Presidential Scholarship he was awarded by OU because of his outstanding academic achievements. Although his tuition will be covered, we still will be writing some large checks for room, board and other unexpected expenses I am certain.

On the bright side, we have money set aside in a Michigan Education Savings Plan account that we will be able to tap into to pay for these expenses. This is an account that my wife and I set up for my son over 12 years ago specifically so we could save for his future college expenses. The best part is that this money has been compounding TAX-FREE!

We also set up accounts for my younger son and daughter who are just about to finish 7th grade this year. Every month, since early 2001, we have been systematically investing a fixed amount into each of their accounts, so we could accumulate the funds necessary to pay for their future college expenses. As I consider how invaluable this savings tool has been for my family, it seemed like a good time to share with you all a great way to save and invest if your goal is paying for a college education for your child or grandchild.

An excellent way to save for college education is by utilizing the Michigan Education Savings Plan (MESP). This is a 529 college savings plan that offers tax-free growth with a low minimum investment requirement and a high contribution limit. Money can be invested on an after-tax basis and the earnings grow tax-free, as long as the money is used to pay for qualified higher education expenses. Qualified higher education expenses include tuition, of course, but take into account a variety of other expenses including room, board, books and other related expenses.

In addition to the Federal income tax advantages, there are also some potential State of Michigan income tax benefits.payday loans Michigan taxpayers may be eligible for a Michigan income tax deduction on contributions made to the MESP up to $10,000 for a married couple or $5,000 for an individual, per year. The deduction is permitted to the extent that any contributions are greater than withdrawals from the MESP during the same calendar year.

This type of account can be opened for a beneficiary by parents, grandparents, relatives and friends who are a US Citizen and at least 18 years of age. A nice feature of these accounts is that whether your beneficiary decides to go to a private or public college or university, in-state or out-of-state, trade or graduate school, the funds can be used for any type of degree program at any eligible higher educational institution in the US and many abroad, not just Michigan institutions.

You may be concerned about what happens to the money if your beneficiary doesn’t go to college or receives a scholarship. You can name another beneficiary to the account as long as the new beneficiary is a family member of the current beneficiary. And if the beneficiary does not immediately go to college after graduating high school, keep in mind that there is no time restriction or age restriction to use the funds. They can remain in the account and compound on a tax-free basis until needed.

However, if you don’t use the money for qualified college expenses, you will be penalized 10 percent when you withdraw the money to use it for something else. In addition, both your state and the federal government will tax the earnings on your account in your current tax bracket.

There are a variety of different low-cost investment options to choose and they are managed by TIAA-CREF. I am a big fan of the age-based options as they automatically adjust the portfolio to take less risk the closer the child gets to college age. Even within the age-based options you can choose whether to be middle of the road, conservative or aggressive.

You can set up and fund an account online which is very convenient or you can have materials sent to you to review. If you want to explore this excellent tool for saving for college, I recommend you visit their Web site or call 1-877-861-MESP.

You can reach Scott Whyte at (248) 932-5200 or at

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