My husband and I have just started a family and we are exploring our options for setting up a college fund to be able to pay for our children's college tuition. Should we do the Florida Pre-Paid or do you recommend a 529 Plan? What are the pros/cons of each?
The best way to do college planning is so start at the beginning of the child’s life. With time, your savings will grow. And you’ll avoid the financial panic that seems to set when parents and students begin to fill out college applications.
The Florida Prepaid program does cover tuition costs, but that is not the full bill at many colleges.
Since 2007, Florida has allowed the state’s public universities to charge something other than tuition. This second amount, called a tuition differential fee, can add up to 40 percent to the total cost. Plus, the differential can increase by up by 15 percent a year.
To cover most of the bill at a Florida university using the prepaid program, you’d have to buy two plans, one for tuition ($16,647 for a one-time, lump sum purchase price for a newborn today) and one for the differential ($19,700). You can also buy the two for a monthly payment of $234.
There’s even a third program, to cover such things as activity and athletic fees and health care costs.
The prepaid’s greatest benefit: Low-risk. You can get your money back for a minimal fee if it’s not used to pay college costs. You can also transfer the plan to another child. And it can be used for certain out-of-state private colleges, community colleges and technical schools.
The cons? It’s expensive. You have to stick to the payment schedule. And your child may choose a school that isn’t part of the program. If you decide to take your money back, you get back what you contributed, but no interest or earnings on that amount.
If instead you opt for a Section 529 college savings plan, what you’re doing is investing the money in the market, with all the risks involved. It could provide a higher growth rate for your savings than the Florida Prepaid. But if you encounter a terrible year, your investment will go down in value.
With a 529 plan, you have more flexibility about the amount you put in and which mutual funds you’ll select. You’ll need to evaluate the fees and administrative costs involves vs. the investment results. There's a great variety of 529 plans, including those that give state income tax breaks to savers in states that, unlike Florida, have income taxes. You can pick your plan from any state.
You also can pay such costs as laptops with 529 plan funds. You cannot do this with the Florida Prepaid funds. That money can only be used for tuition. The one exception: If your child gets a full scholarship, not a partial one, to cover tuition, the prepaid money can be refunded, semester by semester, to you to use as you please.
The 529 plan’s greatest benefit: The money can be used, tax-free, for public or private college in any state.
And here’s a con that’s true for both the Prepaid and a 529 plan: If your child doesn’t go to college and you don’t shift the money to another relative or use it for education, there’s a tax catch. Jack Rosenberg, a certified public accountant and a partner at Goldstein Schechter Koch in Hollywood, says any earnings on the amount you contributed will be subject to income tax and a 10 percent penalty.
Overall, your concern for your child’s college costs is going to pay off, no matter which way you decide to handle your savings.
Both the Florida Prepaid and a 529 plan are good ways to save, compared to saving the money in an account in the child’s own name. That’s because 529 plans are considered assets of the parent, not the child, and parental assets don’t count as heavily in the financial aid calculation as money saved in the child’s own account.
For more information, see www.myfloridaprepaid.com , www.sec.gov/investor/pubs/intro529.htm and savingforcollege.org for more information.
These sites give the basics. But things change. The contribution limits for each plan are set by the state or the educational institution sponsoring the plan. So check the details before you make a decision.
Need help with a money problem? Columnist Harriet Johnson Brackey is working with certified financial planners to get answers. Submit your questions at SunSentinel.com/moneyquestion or call 954-356-4628.
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