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Sunday, Aug 02, 2015
Local News

Prepay or a different way? Saving for college in 2013

BY CHRISTY SWIFT Highlands Today

Fifteen years ago Ray Royce and his wife signed their two young daughters up for a Florida prepaid university plan. Now, the oldest is studying at the University of Florida, and Royce is thrilled that they did. Between the prepaid plan and the Bright Futures scholarship his daughter earned, her tuition and books are covered with money left over for room and board.

“We kind of looked at (the prepaid plan) as a forced savings account for their education,” said Royce.

He isn’t alone. The Florida Prepaid College Board began offering Florida families a guaranteed and tax-free method to pay for college in 1988, and it is the largest, oldest, and most successful prepaid plan in the country. Since its inception, more than 1.5 million college plans have been purchased. Highlands County residents make up only 2,421 of those, but each year more and more people are taking advantage of the plan, according to spokesperson Kristin Lock.

Prepaid college plans work by allowing families to “lock in” a certain tuition rate, which is the current rate plus an amount that actuaries calculate would be required to get the proper return to pay for the projected cost of tuition when the child graduates.

The Florida prepaid college program offers four guaranteed plans. Keep in mind that “community colleges” are now simply called “colleges.”

The plans include the 4-year Florida university plan, the 2 + 2 Florida plan (two years of college plus two years of university), the 4-year Florida college plan and the 2-year Florida college plan. There is also a university dormitory plan that can be added on.

A standard 529 education savings fund, which grows tax-free for education, is not guaranteed, and fluctuates with the market, is also available through the program with new options coming out in May, stated Lock. The 529 plans on have no annual fee and have been rated number one by the College Savings Plan Network, she added.

Lock said that many people are unaware of the flexibility in the prepaid programs. For example, if your child chooses to go to a different institution, such as a university if you purchased a college plan, or an out-of-state or private Florida school, never fear. The value of the plan remains intact, including growth. That means, in a simplified way, that if you paid $10,000 for tuition at UF that is now worth $30,000, and your child decides to go to Yale, Yale gets a check for $30,000.

Other flexibilities in the plan allow up to 10 years to use the funds after your child turns 18, the ability to transfer the fund to another child, and compassion if you run into hard times and temporarily cannot make payments (you’ll be allowed to buy back in after a few months if you are able to make up the difference once you’re back on your feet).

It sounds like a great deal, and Florida prepaid college funds used to be a home run for parents, but skyrocketing tuition costs have made it harder for some parents to even get up to bat. The same comprehensive four-year university plan covering tuition and fees for a newborn in 1998 cost $49.80 a month. Today it costs $331.59.

In fact, in 2011, everyone was blindsided when the Florida Board of Governors allowed universities to add a 7 percent “tuition differential” to the 8 percent increase that had already been approved. Florida prepaid plans originally began addressing this by offering some plans that included the tuition differential and some that did not. But Lock said the current plans do include the differential.

If you bought your Florida prepaid plan before 2007, Lock said, you are exempted from having to pay the differential increase. Those who purchased a plan after 2007 without the differential, however, will find themselves on the hook for it.

Take Stock In Children Executive Director Don Applequist said they have had to make some changes to their program as a result of rising costs. Take Stock in Children, which provides scholarships for at-risk seventh graders who meet certain criteria, used to purchase the 2+2 program, but two years ago, for financial reasons, they had to drop down to only the 2-year college plan.

“When we were buying the 2+2 plan, the cost was about $5,000,” stated Applequist. “Now the cost is close to $27,000,” he said.

Take Stock in Children instead tries to find students scholarship monies to cover the additional two years. The prepaid programs are purchased with donations, and the Florida prepaid board matches the organization’s funds. “The Florida prepaid program has been an outstanding help to our Take Stock in Children program. It’s been a great boon to us,” said Applequist.

One thing parents like about these prepaid plans is that they provide peace of mind and a secure, easy way to save for college.

“That was our way of putting money away for their education in a system where you were never tempted to say, ‘I know we’ve been saving money for the kids’ education, but let’s buy a car or add on to the house or go on vacation,’” explained Royce.

While almost everyone admits you could probably get a better return by investing the money wisely, investments can be risky, time-consuming and beyond the comfort level of many.

But what if your prepaid investment backfires?

Joe Hurley, founder of and author of the book “The Best Way to Save for College, a Complete Guide to 529 Plans” (updated edition publishing later this month) warned that some states’ prepaid programs are failing because state budgets are strapped and there simply isn’t enough money. That’s not a problem for Florida, however, stated Lock. “We are more than 100 percent funded,” she explained. And if the fund ever were to run dry, the state of Florida would step in and pay.

Hurley also told Highlands Today that people are often under the misconception that they are paying today’s tuition rates for tomorrow’s tuition. “You’re not paying today’s rates. You are paying a price well above today’s rates,” he clarified. “You are locking in today’s rates, plus a big premium.”

That becomes a problem if tuition rates don’t rise as quickly as projected, said Hurley. President Obama has stressed the need to make a college education more affordable, and earlier this year, Florida’s public colleges accepted Governor Rick Scott’s challenge to offer a 4-year degree for $10,000. That’s a sign that both political parties feel the need to bring college costs down, and one day (before your kid graduates), they may well do it.

Of course, if you find out you paid too much, you always have the option to cash out your prepaid plan before using the funds. Plans over two years old receive a full refund of the investment, said Lock. Those less than two years old are charged a $50 fee.

But what if you simply can’t afford to save for your children’s educations? Most financial advisors recommend prioritizing retirement over college savings because college can be funded in other ways, and nobody’s going to give you a scholarship so that you can retire.

Some additional ways to fund your child’s education are with your own 529 education savings plan, scholarships, Pell Grants, student loans and having the child work while going to school. Despite the cost, experts still say there is a significant return on investment to obtaining higher education.

One thing Hurley recommends is that you don’t allow yourself to be paralyzed by the number of options out there. On his website he told one reader, “Don't let ‘analysis paralysis’ derail your intention to save for college. The most important step is to begin saving, even if it's with only a small amount.”