Q         Dear Rick:

We just had our first great-grandchild and my husband and I want to do something for him.  I was at the Observer & Eccentric Expo and I asked you this question and you said we should put money away for his future education.  You recommended a Michigan college savings plan.  I forgot to mention to you that over the next couple of years we’re expecting more great-grandchildren and we figure what we do for one we have to do for the other.  Because of this, we figure that we can only afford to put in about $500.  My question to you is does it make sense to open a Michigan plan for only $500, or my husband thinks we should just buy U.S. savings bonds.  What would you recommend?

S&A

A         Dear S&A:

First, congratulations on the birth of a great-grandchild and for thinking about his future.  I cannot think of a better gift from a grandparent or a great-grandparent than the gift of an education.  Education is important today and it will be even more important in the future.  What you are doing to help your great-grandchild is something that will pay dividends throughout his life.  As a side note, just think about how lucky that great-grandchild is because somewhere in the future he will be able to tell people that he knew his great-grandparents.  I know how lucky I am that I can tell people that I knew all four of my grandparents.

In reviewing your situation, I believe it is a slam dunk that you should use the Michigan Education Savings Plan versus U.S. savings bonds.  To me, all you need to do is look at the returns U.S. savings bonds are paying.  U.S. savings bonds purchased now are paying .3 percent.  In fact, over the last few years, U.S. savings bonds have been paying less than one percent.  The bottom line, the cost of a college education is increasing considerably more than .3 percent a year.  Therefore, by investing in U.S. savings bonds you’re guaranteed not to keep up with college cost inflation.

In the past, people purchased U.S. savings bonds not just for their returns, but also as a sign of patriotism.  As a red, white and blue flag-waving American, I understand and embrace patriotism and love of country.  However, the issue at hand is what is a good investment for your great-grandchild, and, considering the returns, that is not in U.S. savings bonds.

When you consider that your great-grandchild will not need this money for at least 18 years, it makes sense to invest a portion of the money in the stock market and that is exactly what investing in the Michigan Education Savings Plan will do.  It will give you a diversified and balanced portfolio that is geared for the long run.

The Michigan Education Savings Plan (www.misaves.com) is what is known as a 529 Plan.  Basically, a 529 Plan allows money to be invested for someone’s post high-school education.  The money can grow tax free and be withdrawn tax free as long as it’s used for a qualified education expense.  There are numerous 529 Plans on the market; however, they’re not all the same.  Some of these plans are state specific in that you can only use the money for schools in that state.  Other plans have commissions and high fees.  Obviously, those plans should be avoided.  One of the reasons I like the Michigan Education Savings Plan is the fact that you can use the money for basically any public or private institution in the country.  In addition, it is commission-free and very low cost.  Vanguard and Fidelity also offer very good 529 Plans.

If you’re saving for someone’s college education, you must recognize that the cost of college is increasing faster than just about anything else in our economy.  To keep up with the increased cost of college you must have a long-term prospective.  Yes, the stock market is volatile and your principal can fluctuate up and down.  However, if you are saving for a newborn’s education 18 years away, your only realistic opportunity of keeping up is to make sure a portion of your money is invested in the stock market.

Good luck!

Rick is a fee-only financial advisor.  His website is www.bloomassetmanagement.com.  If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com