CONSUMER ALERT

MIKE COX
 ATTORNEY GENERAL

The Attorney General provides Consumer Alerts to inform the public of unfair, misleading or deceptive business practices, and to provide information and guidance on other issues of concern.

College Savings Plans

Michigan residents should take care when they establish a college savings account for their children, grandchildren, or others. 

College savings plans, often called "529 plans" after the Internal Revenue Code provision that governs these plans, are an excellent way to address rising college costs. Plan accounts grow tax deferred and, if used for qualified higher education expenses, are entirely tax-free. Additionally, there is no income or yearly contribution limit for 529 plans.

Michigan has two 529 plans: 1) The Michigan Education Trust (MET); and 2) The Michigan Education Savings Program (MESP). MET is the nation's first state prepaid tuition plan and covers tuition at state universities and colleges. MESP, opened in 2000, is administered by the State Treasurer and operated by TIAA-CREF, a nationally recognized financial services organization. MESP offers various investment options, much like a 401k account. MESP accounts can be used for college tuition, books, and room and board expenses anywhere in the United States.

There has been a veritable snowstorm of ads touting 529 plans to parents and grandparents. While many 529 plans are fine investments, these ads often omit critical information.

Most significantly, MET and MESP contributions can earn Michigan tax deductions. Contributions for qualifying MESP beneficiaries can also earn a $200 state match. Investments in other states' 529 plan are not, however, eligible for those benefits. That information, if it appears at all in a national 529 plan advertisement, is often couched in vague terms and buried in the "fine print."

MESP has no enrollment fee, no account maintenance fee, no upfront sales charge (or "load"), and an annual management fee (0.65 of 1%) among the lowest of all 529 plans. 529 plans offered through brokers usually involve additional cost. An upfront sales charge in excess of 3% and annual management fees double or triple the annual management fee charged by MESP is typical. Mutual fund and brokerage ads often don't tell you about the fees and sales charge or offer direct cost comparisons.

Some national 529 plan advertisements don't even tell you which state plan is being touted, implying of course that it is your home state's plan. Read the ads carefully. Ask questions. 

Consider who administers the 529 plan. MET is governed by a board of Michigan citizens appointed by the governor. The State Treasurer has general supervision of MESP. The MESP manager, TIAA-CREF, has offices and administrators in Michigan. Decisions are made in Michigan. Problems are addressed in Michigan. No other 529 plan offers that.

A 529 plan should not be confused with an education IRA (now called Coverdell Education Saving Accounts). Starting in 2002 you can contribute up to $2,000 per beneficiary per year if your adjusted gross income is less than $220,000 ($110,000 for single filers). Education Savings Account money can be used tax-free for college costs, elementary and secondary school tuition and fees, as well as tutoring, books, supplies, uniforms, computers and other equipment for students in private or public schools.

Additional information on Michigan's MET and MESP programs is available on the Michigan Department of Treasury's Web site at http://www.michigan.gov/treasury (use the "Education" Quick Link located on the right-hand side of the home page).