By Alan McCormick
With the month of August well underway, many of us are enjoying watching our children and grandchildren begin another school year, and if you are like me, you are probably also thinking about the big dreams that you have for them. We would all like to give the children in our lives the opportunity to attend college, but the rising cost of higher education appears to be putting those aspirations further out of reach.
For the 2017-2018 academic year, the average bill to attend an in-state public college was $25,290. At a private college, the cost was $50,900. Multiply those numbers by 4 (for a 4-year degree), and we easily move into the 6-figure range.i If this isn’t hard enough to contemplate, costs to attend public or private colleges have risen nearly 3.6% for this year, according to The College Board’s annual reportii. Trends indicate these numbers will only continue to increase.
So, what can you do to help pave the way for your children or grandchildren to have a smooth and cost-effective transition to the college years without a debt burden while staying on track for your own financial goals? Mississippi residents have two options to consider: the Mississippi Prepaid Affordable College Tuition Program (MPACT) and the Mississippi Affordable College Savings Program (MACS). Here are some things to consider when deciding which plan makes sense for your family.
The Mississippi Prepaid Affordable College Tuition Program (MPACT) https://www.treasurerlynnfitch.ms.gov/collegesavingsmississippi/Pages/MPACT-FAQs.aspx
The MPACT program is a prepaid tuition plan that essentially locks in tuition for community and/or public senior college. Prepaid plans put rising college costs within reach of footing those bills. Ongoing increases in costs may hit 8% in some states, which means children born today may face annual bills of nearly $80,000 by the time they’re ready for college. For private colleges, the bill may exceed $150,000 per year.iii
Prepaid plans, like MPACT, are guaranteed to keep pace with inflation rates. Some states guarantee against default of plans;iv some even assume the financial risk in state-run plans.v
You have no investment control with the MPACT program; however, college prepaid plans are generally safe from wild market fluctuations, skyrocketing tuition and college costs, and hyperinflation. And if your children or grandchildren pursue other plans, earnings on your investment still beat Treasury bills or CDs, although they don’t match responsible stock market investments.vi
It is also important to note that should your child decide to attend college out of state or at a private institution, the funds in the prepaid plan will pay up to the average tuition of public universities in Mississippi. You would be on the hook for any amount above this average.
Mississippi Affordable College Savings Program MACS (Savings plan) – https://www.treasurerlynnfitch.ms.gov/collegesavingsmississippi/Pages/MACS-FAQs.aspx
MACS is a more traditional 529 savings plan where the distributions are exempt from federal income tax and Mississippi state income tax if the money is used specifically for qualified college expenses. Additionally, if participating in the Mississippi college savings plans, up to $20,000 (for a joint return) or $10,000 (for a single return) of the amount contributed is deductible from Mississippi adjusted gross income.
One major difference with the MACS plan is that you have investment control and flexibility with the funds invested in the program. Like a 401(k), you’re able to choose from a menu of choices to build an allocation that is appropriate for the time horizon and your risk profile. Of course, this brings market risk, but also more upside potential.
A recent change to the MACS and other state savings plans, as a result of the Tax Cuts and Job Act, is that the funds in these programs can be used for private elementary and high school tuition. Up to $10,000 per student is considered a qualified expense and is not subject to income tax!
How do you know which program to use?
Do the detective work. College savings plans do not exist in an equal opportunity investment world. Get out there and do the legwork. Working with a financial professional is an excellent first step in making your decision.
Here are some tips to help you decide:vii
- Ask: is the plan safe? The theory goes that plans keep pace with tuition increases. The reality, however, is sometimes different. Get assurances before you commit by examining the plan’s annual financial audits.
- Take a hard look in your own financial backyard first. If you still have debt or haven’t saved for retirement, you may want to think twice before committing to a prepaid plan. While the idea of helping your children or grandchildren with college is noble, you ought to consider the financial burden you may place on them in the future for your own lack of preparation.
- Take a very close look at the plan. Find out exactly what it covers. Many plans don’t cover room, board, and other expenses. If you go with a tuition plan, you may have to find ways to cover the other expenses.
- Contribute early and often. Prepaid plans caught the interest of those interested in investing in their children’s or grandchildren’s higher education as an affordable way to cover rising college costs. By contributing early and making installment payments, investors are able to lessen the financial impact and lock in tuition costs at present-day rates.
- Don’t cancel early. If your child gets a full scholarship or decides against going to college, the worst that can happen is you lose interest earned; you don’t lose the principal. However, if your child decides to go to college later on in life or loses a scholarship while in school, you’re prepared to help. You can also pass the MACS or the MPACT along to another family member should the original beneficiary not need the funds.
- Be sure that a college savings plan is right for you. There are alternatives to 529 plans including UTMAs, traditional brokerage accounts, savings accounts, etc. Each has pros and cons but might be worth considering depending on what you’re trying to accomplish for your loved one.
Please note that plans differ from state to state and the information you’ve read here may be different if you or your child or grandchild live outside Mississippi.
If you have any questions about prepaid college plans and how to properly evaluate how saving for college impacts your other financial goals, we are always here to talk. Contact your Ballew Wealth adviser today with any questions you might have!