Applying to a college involves a flurry of applications, transcripts and letters of recommendation. When those offers of admission finally arrive, they may come with a financial aid package that can make or break the decision to attend one school over another. But what’s not always clear is how the financial aid is split between grants or scholarships and loans.
“Financial aid isn’t always what it sounds like,” says Diane Brewer, deputy director of the Michigan Education Trust. “It’s not always gift aid. In fact, many financial aid award letters typically include borrowed funds.”
Student loan debt has become a big problem for students and new grads, says Robin Lott, director of the Office of Postsecondary Financial Planning with the Michigan Department of Treasury. Fifty-nine percent of individuals graduate with student loan debt. For Michigan students who graduated in 2018, the average debt was $32,158, according to information from the State of Michigan.
“Some students look at their financial aid award letter, don’t see the word ‘loan’ and think that is free money. They don’t key into the fact that they are borrowing money that has to be paid back with interest,” Lott says. “Parents need to understand that financial aid can include loans, both student and parental loans. Rethinking what financial aid means is key to saving for postsecondary education.”
Fortunately, parents who start early and save money for their child’s education can help their children reduce or avoid student loan debt completely. “Know that you can start saving now, even if your child is very young,” says Lott.
Michigan families have three 529 college savings programs to choose from, each with its own merits and attributes — and Lott and Brewer agree that getting to know these programs is a worthwhile exercise for parents. The Michigan Education Trust (MET) is a 529 prepaid tuition program that allows families to pre-purchase tomorrow’s tuition at today’s rates.
The Michigan Education Savings Program (MESP) is a 529 savings program that grows over time free from federal tax and offers a Michigan state income tax deduction for contributions. Withdrawals are also tax-free when used for qualified higher education expenses. The MI 529 Advisor is another 529 college savings plan with tax advantages and management through a professional financial adviser.
The gift of education is always appropriate
Saving for college can be a family affair. Grandparents, aunts, uncles and other relatives and friends can contribute to a child’s existing account or open their own account. “Giving the gift of education is always welcome,” says Lott. “Even before a child is born, an individual can open an account and transfer it to the child’s name.”
Birthdays, holidays and other significant occasions are opportunities to contribute to a child’s education. Family and friends can download an Additional Contribution form and mail it with a check. They can also make online contributions securely with a Ugift code provided by the account owner. “There are gift certificates people can print off and put in a card or a frame. It’s very easy,” Lott says.
Opening a Michigan 529 plan offers significant Michigan state tax advantages, too. “All Michigan 529 plans offer a state income tax deduction. That is quite an incentive,” says Lott. With MESP or MI 529 Advisor, the tax deduction amount is capped at $10,000 per year, but MET has no cap, and contributions to both programs can be combined. For example, deductions based on a $30,000 contribution to MET and a $10,000 contribution to MESP can both be taken in the same tax year, according to Lott.