Saving plans sound despite bad economy, leaders say

Michigan’s two college savings programs remain sound investments, despite the struggles with the stock market, leaders said Tuesday.

The Michigan Education Trust (MET) and the Michigan Education Savings Program (MESP) have seen modest growth in the economic downturn — up 1 percent and 10 percent from 2007, respectively, according to the state. And changes in the tax code, for this year only, may make MESP more inviting for families wanting to save early for college.

Families with questions about the Michigan plans are invited to talk with experts Wednesday in a live Web chat. Robin Lott, executive director of MET, and Renee Hill, program manager for MESP, will be available for a Web chats on WXYZ TV’s Web site from noon to 1 p.m. and again from 5- 6 p.m. today.

To participate, go to www.wxyz.com. The experts will provide verbal responses to questions typed into the chat window or called in to (248) 356-0077.

MET is a guaranteed tuition plan that allows parents to pre-purchase tuition at today’s rates for state universities and colleges. MESP is a 529 savings program that is investment-based and where money can be used to pay for tuition, as well as books, supplies, required fees and certain room and board costs at any qualified institution in the nation.

Parents and guardians should consider both when planning for a child’s future to reap the benefits of both, Hill and Lott say.

“With MET you are locking in the cost of tuition today and MESP can help you pay for all the other costs, (such as) room and board and fees and laptops,” Hill said. “There’s an opportunity for parents who have a long investment time frame. And for those who don’t, we still have very conservative options available.”

MET has sold 89,000 contracts; 35,000 have been paid out and a little over 15,000 are being paid out. On average, 3,500 contracts are sold a year, Lott said. The latest annual actuary review of the program in September found that program is sound, Lott said.

“It’s good to see the plan is adapting and responding to the economic crisis,” said Dennis Pace, 58, an advertising director from Dimondale who started an MESP account for his 3-year-old grandson two weeks after he was born.

Tuition on average among Michigan’s public universities increases 7.3 percent a year, Lott said. And if families can buy tuition contracts at today’s prices, the savings can be considerable, Lott said. “I think most folks have realized that tuition in Michigan doesn’t go down,” Lott said of the program’s growth.

For the MESP program, Michiganians have invested $1.65 billion in the program through more than 211,000 accounts, Hill said.

Due to changes in the tax code, investors in the MESP program will be allowed to change investment options two times in 2009, instead of once. This means families with students nearing college age, for example, can move into more conservative investments.

One MESP investment option guarantees the principal plus interest.

The latest investment options might be more helpful for parents of teens, Pace said, but “are great moves. That would make it more appealing for more parents. .. The longer you wait (to save), the more difficult it is.”

The IRS also has increased flexibility in the types of college-related purchases the money can be used for — laptops, most computer software and Internet service are now permissible.

Both plans provide a state tax deduction for Michigan residents and tax-free growth if used for qualified college expenses.

Michigan is encouraging families to consider investing at a time when other states’ 529 plans haven’t fared as well. Alabama’s prepaid tuition plan suffered significant losses and its board froze enrollment Tuesday over fears it wouldn’t be able to pay out tuition in the future.

Prepaid’ College Plans Attract Deposits as Conventional 529s Rack Up Stock-Market Losses

By JANE J. KIM and MELISSA KORN

As the stock market swoons and tuition costs soar, more families are deciding to pay for college in advance through their 529 plans.

For years, families have preferred the savings type of 529 plan — named for the relevant section of the tax code — salting away after-tax dollars, investing them in mutual funds and other investments, and then taking the money out, tax-free, when the time comes to pay for school. But as many of these accounts have been savaged by the market’s plunge this year, families are now turning to the prepaid variety of 529.

Prepaid plans allow families to lock in current tuition rates by making an upfront cash payment in exchange for tuition contracts or credits tied to current rates. They can prepay either the full tuition bill or a portion of it, typically based on the average tuition costs in the state. States usually manage the money, and when a student finally enrolls, he won’t have to pay more — no matter how much tuition costs have risen.

If investors buy only a portion, that same amount is credited toward future tuition bills. In general, the tuition guarantee applies only to state schools within that state, though you can use the money to pay for out-of-state schools. If a beneficiary elects not to attend a college covered by the plan, the investor can withdraw his contributions, usually with interest.

Directors of prepaid plans, which are offered by more than a dozen states, say they’re seeing renewed interest as families anticipate sharp tuition increases. Washington state, which offers only a prepaid plan, has seen a 50% increase in rollovers from state residents who had 529 savings accounts based in other states. Pennsylvania has seen a 43% increase in new account enrollment and a 19% jump in contributions from May through September over year-earlier levels in its prepaid plan. Other states, such as Virginia and Maryland, are seeing a pickup in calls from consumers interested in enrolling in their prepaid plans or rolling over their investments from their 529 savings plans.

Assets in states’ 529 prepaid plans were $16.3 billion as of Sept. 30, compared with about $103.4 billion in 529 savings plans, according to the College Savings Plan Network.

In most cases, the account holder or beneficiary must live in a state in order to invest in its prepaid plan. Two states — Massachusetts and Alabama — allow anyone to invest in their plans. There is also one private-school plan, managed by investment firm TIAA-CREF’s TIAA-CREF Tuition Financing Inc., that is open to anyone: the Independent 529 plan. It allows investors to lock in tuition at nearly 280 colleges, ranging from small liberal-arts schools such as Grinnell and Oberlin to larger universities such as Stanford, Princeton and Duke.

Some states are trying to make their 529 prepaid plans more attractive. In late October, Illinois waived the application fees for its prepaid plan and introduced new pricing plans. In September, Texas launched a new prepaid plan that is managed by a third-party investment manager. Because of legislation passed in 2007, the schools are assuming some investment risk and the program, known as the Texas Tuition Promise Fund, can charge only tuition and fees and a one-time $25 administrative fee. By contrast, the old prepaid plan used to charge premiums.

State Budget Shortfalls
Now looks to be a particularly good time to lock in current prepaid rates, as most programs will likely boost prices for next year’s enrollment, given state budget shortfalls, sagging endowments and a drop in charitable giving. While average tuition and fees at four-year public universities increased 6.4% for the 2008-2009 academic year, according to the College Board’s latest annual report, some experts predict double-digit tuition increases at major public universities.

“If you expect tuition to go up in a rampant way — and if you can lock in future tuition units at today’s costs — then it’s a good deal,” says Andrea Feirstein, managing member of AKF Consulting LLC, a New York consultant to the 529 industry.

There are also some state tax perks. Michigan and Mississippi, for example, will allow the entire prepaid contribution to be deducted from state taxes, though they cap deductions for contributions to their 529 savings plan.

Although some prepaid plans have been around for years, they started falling out of favor over the past decade when investors flocked to 529 savings plans, which offer greater flexibility and the potential for higher investment returns. A number of states — including West Virginia, Ohio, Kentucky and Colorado — temporarily or permanently barred new participants in prepaid plans when poor market returns, paired with sharp tuition increases, bled reserves faster than expected after the dot-com bubble burst earlier this decade.

Howard Ackerman of Princeton, N.J., feels vindicated by his decision to invest in Massachusetts’s prepaid U.Plan, which he began doing in 2003 — a time when most other people were chasing investment returns in 529 savings plans. Today, he’s actually paring back his contributions because he’s already saved enough for his daughter to attend nearly any one of the more than 80 public and private universities that participate in the plan, which is run by the Massachusetts Educational Financing Authority.

“If tuition goes up 10% next year, we don’t care because we’re already locked in,” says Mr. Ackerman, a software developer. If his daughter, now 11 years old, decides to attend a college not covered by the plan, he can withdraw his contributions, plus annual interest. “When it comes time for our daughter to go to school, we basically told her that she can go to any of them [in the plan] and walk away debt-free,” says the 43-year-old.

Prepaid plans aren’t for everyone. For one, the tuition guarantee generally applies only to state universities. While you can get your money out if your child opts for an out-of-state school or private college, the account’s rate of growth is generally limited to increases in tuition as laid out in the plan.

There are some exceptions: Investors in Pennsylvania’s Guaranteed Savings Plan can choose from a variety of tuition indexes at different pricing levels when they open an account. One tracks average tuition at the eight Ivy League schools, while a less-expensive option keeps pace with the state’s private colleges.

Weighing the Risks
Investors, for their part, need to look carefully at prepaid plans and weigh potential risks. Some, such as those offered by Washington and Florida, are backed by the full faith and credit of the state. Other states, such as Virginia, Maryland and Illinois, can ask the state legislature for money to cover potential shortfalls — although the legislature has the right not to chip in.

Some state plans, including those offered by Pennsylvania, Nevada and Michigan, are secured by the plan’s investment fund — which means that investors can lose money if the fund runs out of cash. That risk is typically greatest for someone with a young child, says Ms. Feirstein.

Pennsylvania Treasurer Robin Wiessmann says the state’s Guaranteed Savings Plan has enough assets to cover the demands for the next decade. If there were any risk of a shortfall, she says, the plan would take preventive steps, such as charging premiums for tuition — which it did several years ago — and propose legislation to boost its reserve funds.

Many prepaid programs already tack on premiums to help build a reserve against potential shortfalls in the investment funds. Tennessee, for example, charges $65.66 a unit through Dec. 31 (100 units make up about a year of tuition), while the payout is $56.93 a unit this year.

But even if the prepaid plan you’re interested in does charge a premium, it still might be worth it. “If your child is very young, the premiums you’re paying may not be such a big deal,” says Joseph Hurley, founder of Bankrate Inc.’s Savingforcollege.com, a Web site providing independent information on 529 plans. “But if the child is in high school, it becomes more difficult to overcome that premium.”

On Wednesday, Dec. 3, Elizabeth Edwards brings her message of finding hope and inspiration in life’s challenges to the Troy Hilton, at 5500 Crooks Road. The Henry Ford Health System, Ford Motor Company and Metro Parent Magazine are proud to present this unique opportunity, entitled “An Evening with Elizabeth Edwards.”

The event is rescheduled from its original Wednesday, Oct. 15 date, which was canceled due to Mrs. Edwards mother’s illness.

The country has gotten to know Elizabeth Edwards as she campaigned across the country during her husband’s political campaigns. The day after the general election in 2004, she was diagnosed with breast cancer. Mrs. Edwards was in remission until March 2007 when she discovered her cancer had returned. Her courageous battle with breast cancer has served as an inspiration to women across the country, which she shares in her memoir “Saving Graces: Finding Solace and Strength from Friends and Strangers.” A passionate supporter of children and families, as well as an accomplished attorney, she has been an advocate for many important causes.

One that is dearest to her heart is the Wade Edwards Foundation. The foundation, which helps finance educational and enrichment programs for young people, is named after Mrs. Edwards’ eldest child, Wade, who tragically died in a car accident in 1996 at the age of 16. Mrs. Edwards is the proud mother of three other children: Catharine, Emma Claire and Jack.

Despite a battle with breast cancer, the loss of a son and the pressures of living a life in the public eye, Mrs. Edwards has remained determined to live what she calls “an inspired life.” Mrs. Edwards will share her story of how she’s persevered through tough times. “An Evening with Elizabeth Edwards” is sure to be an uplifting and inspiring event for anyone who is or has experienced difficulty in their lives, especially those affected by breast cancer.

“An Evening with Elizabeth Edwards,” will be held at the Troy Hilton in Troy, Mich. General admission tickets cost $25.

The event is presented by Henry Ford Health System, Ford Motor Company and Metro Parent Magazine. It is sponsored by the Michigan Education Savings Plan (MESP), Magic 105.1 and Inforum.

To purchase tickets or for additional information, visit MetroParentEvents.com or call 248-398-3400, ext. 128.
SOURCE Metro Parent Magazine

http://www.MetroParentEvents.com