Contributed by: Nick Defenthaler, CFP®
The Michigan Education Trust (MET) pre-paid tuition and Michigan Education Savings Plan (MESP) 529 plan are both great ways to save for college. (If you’re just learning about 529 plans, check out this blog on 529 basics and this blog on using 529s as tax credit strategies.) One question we often hear from parents and grandparents, however, is how these education accounts can affect a child’s financial aid eligibility. As I’m sure many of you are aware, financial aid, FAFSA, student loans, etc. can be pretty darn confusing. For that reason, our firm has partnered with Carrie Gilchrist of Oakland University to help us navigate these types of questions from the perspective of an expert in the financial aid arena. Carrie is OU’s Senior Financial Aid Outreach Advisor and has helped thousands of parents and students with financial aid, including scholarships, grants, and student loans. She’s going to be sharing her expertise to help our clients and others with college planning. That’s why I asked Carrie to give her take on what to keep in mind when utilizing the MET (pre-paid tuition) or MESP (529 plan) when saving for college. Here’s what she had to say:
Oakland University’s Carrie Gilchrist:
Saving for college is always a good idea, and regardless of how much has been saved, college students should ALWAYS file the Free Application for Federal Student Aid (FAFSA). Every school has a threshold at which students are eligible for need-based aid, so even if a student is ineligible for Federal need-based aid, the student could still be eligible for need-based aid from other sources by filing the FAFSA. The FAFSA can be filed online at www.fafsa.gov, every year, as soon after January 1 as possible, starting in the student’s senior year of high school. When filing the FAFSA, it may be necessary for students and parents to provide asset information, although not everyone is required to do so. If the student and/or parent is required to report asset information, one of the asset questions will require information about investments.
If the student completing the FAFSA is considered “independent” by the Department of Education, he or she does not need to report parent information on the FAFSA. In that case, educational savings plans owned by the student (and/or the student’s spouse) are reported on the FAFSA in response to the investment question of the assets section.
If a student is considered “dependent” by the Department of Education and must include parent information on the FAFSA, the educational savings plan owned by the parents or by the student, will be included in the parents’ response to the investment question of the assets section.
In both cases, the entirety of the information provided on the FAFSA is used to calculate the Estimated Family Contribution (EFC), which represents how much the Department of Education estimates the student and/or their family can contribute to the student’s educational expenses. The EFC is used by the college or university to determine the type of financial aid the student is eligible to receive.
A major benefit of a college savings plan is it does NOT count against the student in their financial aid award package (different than FASFA). The financial aid award package will list the maximum amount of scholarships, grants, work-study, and loans the student is eligible to receive, but a college savings plan is never considered a financial aid award in their award package, regardless of having to report it on the FAFSA.
As you can see, applying for federal aid, scholarships, student loans, etc. can make your head spin. It is certainly a confusing topic you want to take very seriously and get advice from an expert, like Carrie, if you’re unsure of anything or have questions. Although a college savings plan can impact certain aspects of your student loans, it certainly does not discount the importance and monumental positive impact it can have on a child’s education plan. If you’d like to learn more about college savings please don’t hesitate to contact us. Keep your eyes and ears open for upcoming blogs, webinars and in-person seminars we will be hosting with Carrie so she can continue to share her expertise on this extremely important topic!
Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler, CFP® and Carrie Gilchrist and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with and does not endorse the opinions or services of Carrie Gilchrist or Oakland University. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. You should discuss any tax or legal matters with the appropriate professional.
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