7 Ways to Save For College

Since 1980, the cost of college tuition has increased 1,445%, while overall consumer prices have increased by only 337%, according to the Bureau of Labor Statistics.¹

Therefore, considering where to save for education if you have a child or grandchild makes a great deal of sense, especially because the cost of tuition goes up on average about 7% per year.

With so many options, such as a 529 MESP, 529 MET, TOD, Coverdell ESA, UTMA, UGMA, it is important to uncover which is the best education savings option for you.

UGMA
First, let’s start with the Uniform Gifts to Minors Act (UGMA). Of the ways to save for education, this was essentially the first option (started in 1956) that not only was for education, but was a way to pass wealth down to future generations. Currently, the biggest downside to this account is that once the minor becomes 18, they get unrestricted access to the assets. Therefore, if they wanted to use the money to buy a van in order to travel across the USA for a year or two to “find themselves” after they got out of high school, there is nothing you could do to legally prevent them from using the account’s funds.

UTMA
Next, the Uniform Transfer to Minors Act (UTMA) started in 1996. This account was an improved choice versus the UGMA because it allowed for more options of things to invest in. Also, the custodian did not have to distribute all the assets until the beneficiary reached 21 years old in some states, though Michigan is still 18 years old.

Coverdell ESA
In 1997, the Education IRA, now known as the Coverdell Education Savings Account (ESA), was created. Again, this is another improvement, but there is one huge downside to this account. Specifically, only $2,000 per child can be contributed to this account. Though the assets in a Coverdell ESA can be invested and even if you contributed $2,000 per year for 18 years for a child, you would likely not have enough to pay for a four-year college education, if you wished to do so. Also, Coverdell ESA contributions are not tax-deductible, but the earnings and withdrawals are tax-free when used for education.

Education Savings Bonds
Education Savings Bonds were a staple of college investing in the 70s, 80s, and 90s. However, with interest rates near all-time lows and expectations of three to four interest rate hikes in 2022, savings bonds are less likely to be helpful than they once were. The interest rate for a Series EE Savings Bond purchased from November 2021 through April 2022 has an annual rate of 0.10%. However, regardless of the rate, at 20 years, the bond will be worth twice what you pay for it. If you keep the bond that long, the US Treasury makes a one-time adjustment to fulfill this guarantee.² Therefore, this may be a suitable option for a newborn child/grandchild given the guaranteed doubling feature after 20 years. Series I Savings Bonds issued from November 2021 through April 2022 have an annualized rate of 7.12% locked in for 6 months. Afterward, the rate adjusts based on a fixed rate and a semiannual inflation rate. You can purchase any amount from $25 to $10,000 for each child/grandchild per year for the Series EE Savings Bond and the same limits apply to the Series I Savings Bonds.

TOD
A Transfer on Death (TOD) brokerage account is an option to consider if you feel your child or grandchild will not attend a four-year college or trade school. TOD accounts allow your name to be on the account, but for a child or grandchild to be a beneficiary. Therefore, it is a fully taxable account to you, but you have full control on when and if the assets are distributed. Some parents use this account as a teaching tool for how the stock market works to get their child interested in personal finance.

MET 529
The Michigan Education Trust (MET) is a prepaid tuition program for colleges and trade schools in Michigan. MET contracts offer three purchase options: Lump Sum, Pay-As-You-Go, and Monthly. The Pay-As-You-Go option allows purchases of credit hours. From December 1, 2021 to September 30, 2022, prices range from $120 per credit hour for a community college contract to $750 per credit hour for full benefits.³ The major downside 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 what you invested. The other issue with the MET is that you must pay roughly a 30% premium over current college costs. This means that the MET is only appropriate when purchasing for kids at a very early age.

MESP 529
A 529 Michigan Education Savings Plan (MESP) can be transferred between family members, so even if one child or grandchild does not attend college or trade school, you do not have to worry about losing the funds. These plans facilitate easier college and certified trade school savings in several ways. First, you can set up an automatic transfer to allow the 529 plan to withdraw a certain amount each month from your bank account. Second, contributions up to $10,000 per year by a married couple filing jointly avoid Michigan income tax. Therefore, a $10,000 contribution would save 4.25% or $425 of taxes. Third, the assets grow tax-free and are distributed tax-free. Anyone can contribute to a 529 plan. 529 plans owned by a student’s parent have a minor effect on financial aid eligibility.

If you are interested in learning how any of these education savings options could fit into your financial plan or if you are interested to learn how much you will need to put into a 529 plan per month to fully fund a child’s education, please schedule a meeting with one of our wealth advisors today. Given that there are Federal tax credits for education such as the American Opportunity Credit and Lifetime Learning Credit, an advisor can help you navigate which option is best for you.

Here is a helpful summary chart:

¹ Source: https://www.fool.com/investing/2021/10/25/inflation-rate-passes-growth-of-college-tuition-co/
² Source: https://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds.htm
³ Source: https://www.savingforcollege.com/529-plans/michigan/michigan-education-trust