$1.6 trillion. That’s the total amount of student loan debt outstanding.
The amount of student loan debt is more than auto loan debt ($1.1 trillion) and credit card debt ($1 trillion) and is second to only mortgages.
It hasn’t always been this way. Back in 1999, there was just $90 billion in student loans outstanding.
Are there better ways to plan for college costs without you or your child incurring too much student loan debt? The answer is an emphatic yes, though proper planning is necessary. Thankfully, Florida offers two great options to help in-state parents reduce the burden of paying for college: the Florida Prepaid College Plan and the Florida 529 Savings Plan.
Florida’s college plans offer unique advantages to jumpstart your education savings. But which plan is best? Let’s review the pros and cons of each and how to make the right decision for you and your family.
Florida Prepaid College Plan
The Florida Prepaid College Plan allows families to prepay future tuition costs using today’s tuition rates. Effectively, you are earning the “return” of tuition inflation between now and when your child enters college. The child or parent/legal guardian must have been a Florida resident for the past twelve months. The Florida Prepaid Plan also covers certain fees, and, optionally, university dormitory housing. Florida Prepaid Plans can work in conjunction with scholarships to cover more college expenses. If your child receives a scholarship, you can get a refund for the same amount as the plan would pay a public college or university in Florida.
You can purchase up to a maximum of 120 hours of registration fees, local fee and tuition differential fee coverage, and up to eight semesters of university dormitory coverage. Parents can enroll at any time, though new pricing is announced at the start of the annual Open Enrollment period. Further, you can enroll when you child is a newborn though eleventh grade.
The Plan is designed to be used at Florida colleges or universities but can also be applied to other schools nationwide or at private colleges and universities in Florida. Note, though, that a Florida Prepaid Plan doesn’t guarantee admission to an in-state college or university. Additionally, your child has ten years from their projected college enrollment date to use the plan.
Earnings in the Florida Prepaid College Plan are tax-free when used for qualified higher education expenses. There are three payment options: monthly, five-year, or lump sum. Florida Prepaid Plans are guaranteed by the State of Florida, meaning that you can never lose what you have paid into the plan. If your child doesn’t attend college, your payments can be refunded, or the plan can be transferred to another eligible child or student.
Florida 529 Savings Plan
The Florida 529 Savings Plan allow you to save at your own pace for college and earn market returns by investing your funds in a tax-advantaged investment vehicle. There are no minimum contributions to start and you can invest as much and as often as you like. Investment options in the plan are quite diverse, such as a predesigned age-based portfolio, predesigned static portfolios, and a number of other investment options across many asset classes.
You can enroll at any time, make contributions at any time, and there are no age restrictions to determine eligibility. The Florida 529 Savings Plan covers any qualified educational expenses, including tuition, local fees, health fees, athletic fees, lab fees, housing, transportation, and special needs. Unlike the Florida Prepaid College Plan, plan benefits can be used nationwide without issue. The 529 funds can be used for room and board costs if they are qualified higher education expenses.
The Florida 529 Savings Plan doesn’t guarantee admission to an in-state college or university. Additionally, unlike the Florida Prepaid College Plan, there is no set time period for using the plan. As of 2020, there are no administration fees associated with Florida’s 529 plan. Further, there are no advisor fees, sales commissions, or annual account fees.
It’s important to note that, unlike the Florida Prepaid College Plan, you can lose money within the plan. The degree of risk varies based on the investment options selected. For new contributions, you can change your investment allocation at any time. For existing balances, the IRS limits balance reallocations to twice per calendar year.
An interesting twist with 529 plans is that parents may open a plan in their name and then, in the future, transfer some or all of the funds to their unborn children. Further, you can transfer your plan to another eligible student or close the plan and withdraw the remaining balance. Any earnings that are not used for qualified higher education expenses are subject to federal income taxes. In addition, there is a 10 percent federal tax penalty on the earnings not used for qualified higher education expenses (with certain exceptions for death, disability, and scholarships).
Which Plan Is Best?
This is the million-dollar question (or, more accurately, $250,000 per kid question in today’s dollars). My equivocating answer is “It depends.” I promise this isn’t a cop-out. Both options offer specific advantages when saving for future college costs. But what matters MORE than each plan’s features and benefits is how the aforementioned features and benefits best fit in your financial picture.
If you prefer to cover your costs for in-state tuition and feel uncomfortable taking market risks with this bucket of funds, then the Florida Prepaid College Plan fits your profile. If you value flexibility and prefer diversified market risk over tuition inflation, then the Florida 529 Savings Plan is a better choice.
Those are the clear cases, however. What if you fall in between? While each plan can help cover tuition and housing costs, 529 plans can be used more broadly for other expenses. Further, 529 plans project a lower total cost based on our assumed rates of return between long-term tuition inflation and a diversified market portfolio. To be clear, this additional flexibility of 529 plans does come with a cost — the returns in Florida Prepaid Plans are guaranteed while the returns in the Florida 529 Savings Plan are subject to the performance of their underlying investments.
Education Planning with Harbor Crest Wealth Advisors
So what’s the best plan for you and your family? Hopefully, this article can help you better understand the in-state benefits available to you. Note, though, there are several other accounts and strategies that can be incorporated into your broader education savings goals that we didn’t discuss in this article. If you would like additional advice on how to determine the best way to save for your child’s education, sign up for our newsletter.