Having a baby is an adventure that involves many significant emotional and financial decisions. Initial concerns range from which diapers to use to which car seat is safest. In the next phase, after seeing the quotes for various daycare, nanny, and preschool providers, many parents quickly begin to wonder, “How are we ever going to pay for college?”
For the 2022-2023 tuition year, the average annual cost (inclusive of tuition, fees, and room and board) for a 4-year, in-state public college was $23,250 and for a 4-year private college was $53,430.[1] Fortunately, the great state of Florida offers many resources to help families save for this significant financial commitment. The below discussion will focus on the Florida Prepaid Plan and 529 Plans, which each offer unique benefits for planning for college.
Additionally, on March 27, 2023, Governor DeSantis signed new legislation regarding the Step Up for Students Scholarship. The funds from this scholarship can be used by families across the state of Florida for participating private schools for grades K – 12 as well as other limited uses. As a result, many families attending private schools may now have more funds remaining to allocate towards 529 and/or Florida Prepaid Plans than were previously available.
Florida Prepaid Plan
The Florida Prepaid Plan is designed to offer families peace of mind by guaranteeing the cost of tuition to Florida’s in-state colleges and universities. Specifically, the Prepaid Plan allows families to make payments (1) monthly; (2) over five years; (3) or lump sum to guarantee the cost of tuition to any of the following:
- 2-Year Florida College Plan (60 Hours)
- 4-Year Florida College Plan (120 Hours)
- 2 + 2 Florida Plan (60 Hours College; 60 Hours University)
- 1-Year Florida University (30 Hours)
- 4-Year Florida University Plan (120 Hours)
Therefore, regardless of market performance or increases in tuition, the Prepaid Plan guarantees payment of the cost of tuition. From an operational perspective, the college or university bills the Prepaid Plan directly for tuition expenses. Additionally, families may opt to add a Dormitory Plan, which guarantees payment for housing at preapproved on-campus dormitories. However, the plan does not guarantee housing availability and only guarantees the cost at certain on-campus dorms.
Florida has 28 colleges and 12 state universities. Additionally, a student earning an associate degree from a Florida College is guaranteed admission to a State University in Florida. While residency is required to obtain a Prepaid Plan, it is not required to maintain a plan. Therefore, children with Prepaid Plans who subsequently leave the state will still be treated as “in-state” for tuition purposes. This benefit alone may make the Prepaid Plan attractive for many military families or others who frequently relocate for career advancements.
The Prepaid Plans are designed to be applied at Florida Colleges and Universities. However, if a child attends a private or out-of-state school, the Prepaid Plan will pay the same amount that the plan would have paid to an in-state Florida school. Similarly, if a child receives a scholarship, parents can receive a refund for the same amount the plan would have paid a Florida school. Plans are fully guaranteed by the State. Therefore, if a child decides not to attend college, parents are eligible to receive a refund of the proceeds invested.
If I recently had a baby, I could visit the “Plans & Pricing” tab on the Florida Prepaid Website to review the pricing options for the 4-Year university plan. The lump sum plan requires a $28,558.62 payment, which is estimated to payout $63,500 in 2041, yielding an approximate return of 4.6%. While the return itself appears conservative, it does remove the stress of tuition costs escalating. Further, if we were to ever move out of state, I would have comfort knowing that my child would still be considered an in-state student for tuition purposes. To review your child’s specific pricing, simply visit the “Plans & Pricing” tab on myfloridaprepaid.com with your child’s birthday available. Anyone can purchase a Prepaid Plan (parent, grandparent, friend, or other relative); however, the child must be a resident at the time of enrollment.
Given that the Prepaid Plan covers tuition, specifically, I reviewed in-state tuition expenses for the 2022 and 2023 school year at the following:
- University of Florida – $6,380
- Florida State University – $5,616
- University of Central Florida – $6,368
- University of North Florida – $6,389
After a review of the above information, it is evident that families currently paying for students to attend in-state Florida universities are likely paying more for room and board than tuition. To help plan for these additional expenses, a 529 Plan may serve as a great supplement.
529 Plans
529 plans are tax-advantaged savings accounts to be used for education expenses. Unlike the Florida Prepaid plan, which only covers college and/or university tuition reimbursement, 529 plans offer more flexibility. Specifically, 529s can be used to pay for room and board (both on and off campus), computer expenses, apprenticeship costs, $10,000 (lifetime) student loan repayments, and up to $10,000 of K-12 tuition expenses annually.
Funds in a 529 account grow tax free, and withdrawals for qualified expenses are withdrawn income tax free. However, withdrawals for nonqualified expenses will trigger tax consequences and penalties. Specifically, federal income taxes will be due on any earnings withdrawn for non-qualified expenses. Additionally, a 10% federal penalty tax and possible additional state or local taxes may be imposed.
Grantors maintain control of the funds until they are ultimately deployed to the beneficiary. Beneficiary designations may be changed at any time. Therefore, if an oldest child does not utilize the entirety of his or her 529 Plan, a younger sibling, or any other individual, may become the beneficiary of a given plan. In 2023, a grantor can gift any individual up to $17,000 in assets per year, free of federal gift taxes. Alternatively, a grantor can gift a lump sum contribution of $85,000 (or $170,000 per couple) that can be applied as though $17,000 per year will be gifted over the next five years. Under this lump sum scenario, the grantor(s) cannot provide any additional gifts to the same beneficiary over the next five years. This scenario is primarily used by grandparents as an estate planning strategy.
529 plans are administered by each state. Some states offer multiple 529 plans. While certain states have residency requirements for participation, others do not. The website savingsforcollege.com provides an overview of the various characteristics of each plan, including a summary of fees, investment options, and relevant tax considerations to help determine which plan may be the best fit for your family.
Additionally, the Secure Act 2.0 provides that beginning in 2024, beneficiaries of 529 plans may transfer unused funds directly to a Roth IRA without incurring penalties or income taxes. There are several caveats to this benefit. Specifically, the 529 plan must have been open for a minimum of 15 years prior to the rollover. Rollovers cannot include any amounts contributed within the preceding five-year period. The maximum a beneficiary may rollover throughout his or her lifetime is $35,000. For a complete understanding of the limitations, we recommend you speak with your financial advisor.
Florida Step Up for Students Scholarship
This scholarship became effective July 1, 2023, with funds applicable for the 2023-2024 school year. The bill expands eligibility for all K-12 students, regardless of household income. At my daughter’s school, the scholarship pays the school directly. Any remaining tuition costs are paid by our family. The scholarship amounts awarded are dependent on your county and the grade of your student. For our family personally, it decreased tuition from ~$1,300/ month to ~$400/ month.
Scholarship funds are not guaranteed each year. However, if you are the recipient of these funds, consider repurposing the saved out of pocket dollars to your other education plans. These contributions will increase the growth potential of your plans and provide a greater cushion for your children’s college needs. As discussed above, if any 529 funds remain after college, your student may also roll these funds to a Roth IRA (lifetime up to $35,000). 2023 is the first year of the expanded scholarship program. We will be watching closely to monitor how the program evolves.
Conclusion
529 plans offer a flexible, tax-advantaged savings option that allows grantors to maintain control of how funds are invested and deployed. While results are not guaranteed, unlike the Florida Prepaid Plan, the 529 Plan allows for families to plan for other expenses, such as off campus housing, computer expenses, and private K-12 education expenses to the extent relevant. Additionally, given that the grantor selects the investment option, the rate of return realized may exceed or fall short of the guaranteed rate of return in the Florida Prepaid Plan. Depending on where your child desires to attend school and the types of expenses you are planning for, one or a combination of both savings tools may be helpful for your family. Further, depending on where your child attends K-12, it may be beneficial to research the Step Up for Students scholarship. Saved dollars on K-12 tuition may be applied towards additional college savings. Regardless of the tool selected, making a commitment to save for your child’s education early on will have a significant impact.
Note: Original posting date for this blog was August 30, 2021. It was revised with updated figures and information on August 24, 2023.
Caitlin Frederick, CFA, CPA, is the Director of Financial Planning and a Wealth Advisor at Ullmann Wealth Partners. Prior to joining the firm, Caitlin worked in the Valuation and Capital Markets groups at PwC for over five years. Most recently, Caitlin worked for a local boutique investment banking firm performing business valuations.
[1] Trends in College Pricing 2019, College Board Advocacy and Policy Center