What Are Prepaid College Plans, and Are They Good Deals?
I was 23 when my first child was born. We married young and had children quickly and I have no regrets. There is no doubt about our lack of preparedness in some areas, though. I didn’t even know how to change a diaper, for goodness’ sake.
Still, it was a wonderful time — with a great deal of sleep deprivation.
Plus, my parents were incredibly generous and gave us many gifts for our children. Perhaps their most significant one was a four-year Florida Prepaid college plan for each of my children.
It was an amazing gift, and I want to tell you why. I’m not a financial planner and I don’t have any kind of financial credentials. I’m just a mom who has worked hard to instill sound finance habits into her children. That said, prepaid college plans have been perfect for my children, even though they’ve taken different academic paths.
My Children’s Experiences
My son is an academic at heart. He rarely meets a textbook he doesn’t love. He also scores amazingly well on just about every test he has ever come across.
When he was 18, he graduated from high school with a four-year degree in communication and a 3.87 GPA. And no, I’m not quite sure how that happened, considering the norm for our family!
At first, I thought the prepaid college plan was basically worthless to us. But then we discovered my son could apply it toward his MBA. It left him with some out-of-pocket costs because of the higher fees for a graduate program, but it took care of a big chunk of his tuition.
My daughter, on the other hand, doesn’t love school. In fact, she hates it. She’s a good student, but had to fight for the 4.0 she maintained as a freshman in college.
She doesn’t typically do well on exams, but she excels in class work. She turns in assignments early and takes advantage of every extra credit opportunity that comes her way.
When she took the SAT, she scored so poorly that she didn’t qualify for the Bright Futures Scholarship here in Florida. And let me just take this opportunity to thank the state for making sure my kid knows that she doesn’t qualify for a bright future . . . ahem.
Because of Florida Prepaid, my daughter has zero out-of-pocket expenses for tuition.
Without any type of scholarships, she’s able to attend school without incurring debt. This is all thanks to my parents.
The Benefits of Prepaid College Plans
One of the many benefits of the Florida Prepaid plan is that it is backed by the state of Florida and you can’t lose your money. With a 529 savings plan, you can lose your money. This depends on the degree of risk you select according to the Florida Prepaid website.
Another benefit is that the plan can be transferred to another eligible child or student.
I took a look at the financial statements today. My parents paid $5,652.42 for a four-year university plan for my son and $8,242.71 for my daughter in 1993 and 1996, respectively.
If you’re considering how to finance your children’s education, take a look to see whether your state offers prepaid plans. If it does, consult a professional to help you determine what’s best for your family.
The amount my parents paid was a one-time fee that covered everything. The program does have payment plans available. They simply guarantee the education when the fee is paid, no matter what tuition costs when the child eventually attends school.
Thanks to my parents, both of my children will graduate from college without student loan debt. This will make all the difference as they start their professional lives.
Prepaid College Plans vs. 529 Plans: What’s the Difference?
Both prepaid college and 529 savings plans can help you fund somebody’s education, but there are some major differences. For example, prepaid college plans aren’t available in all states. Plus, there are caveats on how you can use them.
“Prepaid college plans are narrower in the sense that you have a restricted choice of schools and can’t use the funds for room and board,” says Peter Neeves, Ph.D., the director of CentSai’s financial expert community. “But they provide a virtually absolute protection against tuition inflation at the participating schools. ”
Neeves also notes that 529 plans are more commonly used due to their flexibility. “You can use the funds at any college or university, as well as for tuition at elementary and secondary schools,” he says. “It really comes down to your objectives and what you are looking to accomplish.”
The 529 Plan as an Alternative
Not all states offer prepaid college plans. If yours doesn’t — or if you want more flexibility than a prepaid college plan offers — then a 529 savings plan might be a good alternative. But just what the heck is it, anyway? Thanks to the Securities and Exchange Commission (SEC), we have some answers:
A 529 plan (or “qualified tuition plan” to give its legal name) is a tax-advantaged savings plan, designed to encourage better savings habits for your future education costs. These plans are sponsored by the state, state agencies, or educational institutions.
There are two types of 529 plans: prepaid tuition and education savings plans.
The Prepaid Tuition Plan
You (the saver or account holder) can buy credits at participating colleges and universities for future tuition and mandatory fees at current prices. Sadly, this doesn’t include room and board.
These plans aren’t guaranteed by the federal government, and they may fall short if the sponsor has a financial shortfall, or if you choose to attend a different, nonparticipating college.
Education Savings Plan
You (the saver) open an investment account to save for your beneficiary’s future qualified higher education expenses, including tuition, mandatory fees, and room and board. You can use withdrawals from this account for any university, and even some international universities.
Unlike prepaid tuition plans, you can also use 529 plans to pay for primary- and secondary-school fees. All of these plans are sponsored by state governments.
How 529 Plans Work
Fees and expenses involved in 529 plans will lower your returns. These can be enrollment or application fees, admin fees or ongoing account management fees.
Investing in a 529 plan may offer savers special tax benefits.
These benefits vary depending on the state and the 529 plan. In addition, state and federal laws that affect 529 plans could change. You should make sure you understand the tax implications of investing in a 529 plan and consider whether to consult a tax adviser. (If you decide to figure it out on your own, software like TurboTax might come in handy.)
Restrictions will apply to any 529 plan. Education savings plans don’t allow moving between investment plans freely. Under current tax law, you can do this only two times per year.
Withdrawals are restricted, too. You’ll incur a penalty if you withdraw money for anything other than education expenses.
The 529 plan will also affect a student’s eligibility for financial aid when applying to college. Assets in a 529 plan are considered parental assets, not a student’s assets, in determining expected family contribution (EFC). This results in a lower EFC and potentially more aid than if the assets were in the student’s name. Aid is ultimately at the discretion of the institution, and each treats situations differently.
Additional reporting by Kelly Meehan Brown