529 College Savings Plan vs Florida Prepaid

Each year an astonishing 54% of college attendees take on loans to pay for their education. That’s why student loan debt is and will always be the most common form of debt, hand in hand with credit card debt.

Out of this number, 14% of adults are still struggling to pay off their student loan debt.
Education plays a significant role in forming you as a professional, but the cost is too high for every young adult to cover it in cash.

If you’ve ever been faced with student loan debt, you probably want to keep your future children away from it. Or maybe you opted out of enrolling in a specific university because the tuition was too high.

I had my eyes on a specific private university until I found out it costed way more than I could afford. My parents didn’t have college savings for my sister or me, and I couldn’t ask them to cover my hefty tuition with her in medical school. Student loans were out of the picture, so I attended a state university that left much to be desired.

I don’t want my future kids to experience the same disappointment. That’s why I started researching the best way to save money for their education.

Saving money and keeping them in the bank is a bad idea, as we’ve already discussed. Bank interest rates on savings are insignificant and combined with the yearly inflation; you might end up with less money when your kids need to attend college.

Luckily, there are better, more profitable ways to help your kids with college expenses. You can aim for a traditional brokerage account, a specialized 529 plan, or a California Prepaid plan.

The 529 Plan Overview

The 529 Plan

The 529 plan is a flexible tax-free savings account you can open to fund your children, grandchildren, or nephews’ future education.

The 529 plan is a savings account used to cover educational costs from kindergarten to college. They’re mostly offered by the state, education facilities, or other organizations.

You can set up a 529 plan in states where you’re not a resident, but you won’t get a tax break. Contributions to a 529 plan aren’t subject to federal income tax for the residents of 30 states.

Anyone can open a 529 savings plan and set a beneficiary, but commonly, parents are the ones who do it.

Why Choose A 529 Plan?

A 529 savings plan offers you the opportunity to set aside money in a savings account with up to 11 investment options.

Your money will grow over time tax-deferred. Every withdrawal is tax-free if the money is used for qualified educational expenses. A 10% penalty and income tax are applied if you withdraw money for other purposes, except in the case of disability or death.

Your contributions are invested in mutual funds of your choice with different levels of aggressiveness. You can even choose a target date funds which are optimized to switch the investments from aggressive to conservative throughout the years as the beneficiary’s college enrolment day nears.

A 529 plan covers all educational costs like tuition, boarding, and food, learning materials such as books, internet, computers, and special equipment. Special needs equipment also falls under the IRS qualified expenses.

How Much Can You Contribute To A 529 Plan?

The maximum 529 plan contributions sum is set by the state and can go up to $380,000. You can make yearly contributions or deposit a lump sum.

If you decide to make yearly contributions, the limit is $14,000 per person of $28,000 per married couple. A lump sum limit is equal to a 5-year contribution; $70,000 per person or $140,000 per married couple.

If you have two children, you can contribute these sums to each of them. It’s the same rule with grandparents; they can contribute up to $28,000 per grandchild.

Pros And Cons Of 529 Plan

While setting aside money for your child’s education is a smart and responsible move, where you decide to keep it might hurt or benefit them in the future.

The 529 plan is a savings account that covers educational costs. It can be used to cover any 4-year college, university, or educational program. You, as a parent, are the owner, and your child is the beneficiary. But if your child decides they don’t want to attend college, you’re not going to lose your funds.

You can transfer the 529 plan to their sibling or another relative. Even if the parent decides to go back to school, they can change the beneficiary to themselves and use the 529 savings plan.

To open a 529 savings plan, the beneficiary doesn’t need to be a certain age, and there isn’t a certain time window when they must spend the money.

Florida Prepaid Plan

Florida Prepaid Plan

The other form of a college savings plan is the Florida Prepaid Plan. It offers you the opportunity to lock in the future college tuition, tuition differential fees, and optionally housing costs.

This locks the tuition’s current price, and you have plenty of time to pay it out before your children grow up. With tuition costs rising each year, this is a good option.

To open a Florida Prepaid Plan you or your child must have been a Florida citizen for at least 12 months. While you can enroll at any time of the year, there is an age restriction. You can start a Florida Prepaid Plan from the moment your child is born up until they’re in 11th grade.

You can make yearly, 5-year, or lump sum contributions.

Why Choose A Florida Prepaid Plan?

Tuitions are on the rise since forever, so locking today’s price is an unbeatable benefit.

The Florida Prepaid Plan pays the costs covered under your chosen type at any state college or university. Even if the tuition costs are higher than anticipated, the program covers them. Additionally, you can purchase a university dormitory plan.

Earnings on the plan are tax-free when they’re used for educational purposes. You can cancel the plan at any time and request a refund of the contributions you made, minus the fees.

The fund can be used from the set enrollment date for up to 10 years. If your child starts college at 18, they have until 28 to use the Florida Prepaid Plan’s funds.

When your child earns a scholarship, the plan will refund you the amount they would otherwise pay for the tuition.

Starting to pay off your child’s tuition from the moment they’re born is a significant step. You’ll grant them financial freedom and less to worry about when they turn 18.

How Much Can You Contribute To Florida Prepaid Plan?

Contributions to a Florida Prepaid Plan can be made whenever you like. There aren’t limitations to how much and how often you need to contribute.

You can purchase up to 120 hours registration fees, tuition and local fee; and up to 8 semesters of university dormitory coverage.

After you set up your plan, you can set a monthly contribution and put prepaying tuition as part of your monthly budget.

Your family or friends can also contribute towards your Florida Prepaid Plan by mailing a check and gift certificate form including your account number and the student’s name.

Pros And Cons Of Florida Prepaid Plan

Pros And Cons Of Florida Prepaid Plan

Florida Prepaid Plan is only applicable for post-secondary education and doesn’t cover any other education expenses like boarding or learning materials. You must purchase an additional university dormitory plan if you want to cover housing for your student.

Locking the current tuition price is the greatest perk of the Florida Prepaid Plan; you can fight inflation. The plan opening time frame is not short, your beneficiary must be born for you to open a Florida Prepaid Plan. And if you think that now is the best time to lock the tuition price, this might be a problem.

If you start paying college tuition when your child is already in 11th grade, there might not be a big difference in tuition prices until they enroll in 2 years.

With the Florida Prepaid Plan, you can’t lose your money – even if your child decides not to attend any university. You can get a refund of your contributions or change the beneficiary to another child in the family.

Each contribution you make is invested in the market and expected to grow to cover the tuition price’s potential difference.

If your child decides to attend a private university or out-of-state college, the plan will pay the same amount as it would at a public university in Florida. Beware that the plan doesn’t guarantee admission to any state university or college.

The Verdict – Which Education Savings Plan Is Better?

As with every financial decision, it’s mostly personal and common sense. Considering your plans for the future, weigh in on the best decision you can make for your child.

The 529 Plan offers you more flexibility, freedom of choice, and covers a larger part of educational expenses. The thing is, it’s not that much different from a traditional brokerage account where you have the freedom to withdraw your money in cash and pay for any expense without fearing if the IRS classifies it as an educational expense.

The Florida Prepaid Plan offers you the benefit of paying today’s tuition prices for a student that will be eligible to enroll in 10 or 18 years. In the last 5 years, tuition prices grow by 2.95% and 2.55% per year, almost equaling inflation.

You can’t make choices for your children, so it’s best to set up a plan or a savings account that will allow them to attend a university of their preference, in the US or abroad.

If I decided on a specialized education savings plan, I would choose a 529 plan because it gives enough freedom and covers most expenses from kindergarten to college.

Final Thoughts

Being a great parent is not easy, and we often try to correct our parents’ mistakes. If your financial situation allows, saving for your children’s college expenses is one of the things you can do as a great parent.

It’s an important step that can cause a chain reaction – your children will save up for their children’s college, etc. So maybe we will get on the road to end student loan debt once and for all.

As a young adult stepping into the world of the unknown with a massive debt on your shoulders is overwhelming. Why not try and set your children on a great start after graduation by freeing them from debt?

Even if you opt for a different savings account from the ones we discussed above, it’s more than not doing anything.

Do you plan on saving for your children’s university tuition? Did you have to face student loans to attend higher education?

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