Have a baby? Now is the time to start thinking about college, say financial experts – even though it’s likely the last thing on your mind!
“The earlier a family starts saving money for their children, the better,” says financial advisor Bob Hoger. “With college costs soaring, it’s difficult today for families to save enough money to cover all of the expenses.”
What’s a 529 plan?
One of the primary ways families can save for college is to invest in one of Michigan’s two college saving plans: the Michigan Education Savings Program (MESP) and the Michigan Education Trust (MET). Both are 529 savings plans.
The “529” stands for the federal code that designates contributions to these plans tax-exempt. Both plans can also be transferred to out-of-state schools.
MESP vs. MET
There are, however, some distinctions between these two.
MESP is similar to a 401(k), meaning funds will fluctuate with the economy. It can be started with as little as $25. There’s no limit to how much money can be invested annually, but the maximum balance per account is $235,000. The funds cover tuition, room and board, and any additional college costs.
However, when it comes to MET, the money is used solely for tuition. “It allows parents, grandparents or others to purchase tuition at today’s rates,” says Robin Lott, the executive director for MET – and there are three plans to choose from: full, limited and community college.
If a child decides against attending college, the money can be refunded or transferred to a member of the immediate family.
Benefits of early planning
Investing in your child’s future from the time he is in diapers helps you save more money for rising college costs – which Hoger predicts could be as much as $285,000 for five years, considering most students are taking five years to complete a bachelor’s degree.
That’s why careful long-term planning is the key for parents. For Jennifer Gamet, a mom of three from Brownstown, saving for her children’s education started before her first son was born – around the eighth month of Gamet’s pregnancy.
After meeting with a financial advisor, Gamet and her husband decided to invest in a life insurance policy – an investment that can pay out if tragedy strikes or can be tapped into for big expenses, like college or buying a house, as her children grow into adults.
“It’s a fixed bill that we have every month,” Gamet says.
Money is pulled directly from their account on a monthly basis, much like a loan payment or mortgage. A family’s financial situation will determine the amount of money saved monthly, along with the best savings option, says Hoger.
Sticking to it
Discipline – along with a money saving strategy, whether its MET, MESP, a life insurance policy or many of the other savings options available – will help fund your child’s future.
“Any savings you can do for your child is good for your child,” Gamet says.
This post was originally published in 2011 and has been updated in 2015.