According to the University of Michigan website, it costs over $30,000 per year to attend UofM. Michigan State is not much cheaper with a year costing $25,000. Even scarier, if the trend continues it will cost nearly $270,000 for my 4 year old to graduate as a Michigan Wolverine (hopefully our football team will be better by then). These are staggering numbers and if you want to avoid having to take out a second mortgage to help pay for your kids to go to school, you’ll need to start saving early. Luckily, Michigan offers two excellent savings options in the MESP and MET. This post will investigate which Michigan college savings plan is better for your children.
The Michigan Education Savings Plan (MESP) is a 529 college savings plan. The biggest benefit that the MESP offers over other savings accounts is the tax benefits. When you contribute to the MESP you are able to deduct Michigan state taxes on up to $10,000 of contributions per year. Like a Roth IRA, the funds are invested and grow for you tax-free. The MESP can then be withdrawn to pay for college costs completely tax-free. The other nice thing about the MESP is that your child can attend any school in the country and is not limited to Michigan schools.
The biggest drawback of the MESP is the restrictions on how the funds can be used. In order to get the tax benefits of the MESP, the funds must be used for college costs. Any other use of the funds and there are taxes and penalties on any of the tax-free growth on the account. If your child doesn’t end up going to college or if he needs the funds to help pay for other expenses, the taxes and fees could really add up.
However, there was a change to the MESP and other 529 plans in the most recent tax law. 529 plans, like the MESP, can now be used to pay for private elementary and high school tuition and expenses. $10,000 is the current annual cap for private elementary and high school costs that can be covered by the MESP.
The Michigan Education Trust (MET) is a prepaid tuition program. You are buying college credit hours at today’s rates and not the higher college costs in the future. You can think of it also like a savings account, in which your savings grows at the rate of college inflation. As of June 2019, to buy a MET Full Benefit credit hour it would cost you $612 and a full year costs $18,360. If you do believe that college costs are going to continue to increase at a high level, you may find that the MET is a great investment. Also, like the MESP you can deduct state taxes on the contributions that you make. The MET does come with its drawbacks.
The Drawbacks of MET
The main drawback of the MET is that if your child chooses a school outside of Michigan or doesn’t attend college, you could lose a significant amount of your investment. For example, if your child doesn’t go to college and you request a refund you would currently only receive an amount equal to the lowest tuition of Michigan 4-year Universities. The lowest 4-year tuition is currently only $11,082 per a year of college purchased. If your student goes out of state or chooses an in-state private school, MET will cover the average cost of a public Michigan college which will probably not cover the cost of tuition.
The other issue with the MET plan is the amount that you have to pay. Like I mentioned earlier, it currently costs $18,360 for a full year of a MET contract. The average college tuition cost in Michigan is currently $14,015 according to the MET website. This means that you are currently paying a 30% premium over current college costs. Even the University of Michigan, the most expensive public school in Michigan, tuition costs just over $15,000 for freshman and sophomores. You aren’t really buying future college credits at today’s rates. You are buying future college credits with rates that are much higher than today’s. This means that the MET is really only appropriate when purchasing for kids at a really early age.
Remember those old hair replacement commercials in which the actor says, “I’m not just the owner, I’m also a client”? I’m a client of the MESP and believe it is the best college savings plan out there. Here are the main reasons I chose the MESP:
- I like that the MESP can be used at every college in the U.S. and I don’t lose any benefit if my son goes to college out of state or a private school.
- If my son doesn’t go to school, even though I would have to pay taxes and fees on the MESP growth, I wouldn’t lose a significant amount of my money like I may with the MET.
- I believe the MET plan is too expensive. If I had to pay current tuition costs, that makes sense, but why would I pay tuition costs that are currently 30% higher than current tuition costs? This seems to defeat the purpose of a “prepaid” tuition plan.
- The higher the tuition inflation rate, the better the investment the MET plan. Over the past 15 years or so, this would have been a pretty good investment as tuition has increased by 6% per year. I just don’t know if tuition growth will continue at this torrid pace. Just a small sample size but average tuition costs slightly decreased in 2018 compared to 2017. It is possible that this slower growth trend continues. If so, this would make the MET plan an unattractive investment.
Obviously, I chose the MESP plan to save for my child’s education but the savings option that you choose isn’t as important as starting to save early and saving often. College is expensive and even if tuition cost growth starts to slow, college isn’t getting any cheaper. Choosing the wrong college savings plan isn’t the worst college savings mistake that you can make. Choosing not to save is the worst mistake you can make for your childrens college education.
Are you interested in working with a Michigan based fee-only financial planner? Schedule a time below to meet with a financial planner help you prepare for college as well as other financial goals.