Our coronavirus coverage is free for the first 24 hours. Find the latest information at Please consider subscribing or donating.

  1. Archive

Paving the way to tuition

The Florida College Investment Plan opens for business Monday and the timing couldn't be better for Safety Harbor mom Gena Cox, who plans to check out her new option.

"I've been looking for another savings vehicle," she said. For good reason. Her 12-year-old daughter Marin Jones, a seventh grader at Safety Harbor Middle School, has expensive educational ambitions.

"She wants to be a lawyer," Cox said. "She did a research project on careers and found out litigators get paid to argue, so she figured that was her thing."

The new plan will be offered alongside the existing Florida Prepaid College Program, in which Marin already is enrolled. Parents can choose between the two plans or sign up for both of them - or for any of dozens of other states' plans, most of which are open to any U.S. resident.

College savings plans, dubbed 529 plans after a section of the IRS code, have become one of the hottest products in the financial services business. Investment plan assets more than doubled over the past year, to about $14-billion, with another $8-billion in prepaid tuition plans. Florida's prepaid plan is by far the largest, with $3.9-billion in assets.

The 529 plans offer three big advantages:

+ Investment earnings can be withdrawn tax-free for qualified education expenses, including housing, books and required equipment such as computers.

+ The plans can be used at most any college or vocational school, some of them in foreign countries.

+ The donor who sets up an account maintains control, including the ability to change the beneficiary.

The law allowing tax-free withdrawals kicked in this year and expires at the end of 2010 but could be extended. Previously, investment earnings were taxed at the child's rate when withdrawn.

Florida's prepaid college plan promises to cover tuition, fees and, under some plans, dorm costs at state universities. It has enrolled 538,000 students over the past 14 years, most of whom are still younger than college age.

The new investment plan, which is more flexible but potentially riskier, was authorized by the state Legislature three years ago. It has taken this long to put the details in place because Florida chose a do-it-yourself approach. The state selected its own investment managers and is selling the plan directly to the public. Most other states turned over their programs to a mutual fund company or brokerage.

"The best thing is that our program is all about sending kids to college, with nothing about profits," said Stanley Tate, chairman of the Florida Prepaid College Board, which manages both plans. Neither plan pays commissions to financial advisers, which helps keep costs low for participants.

Although other states' plans have a head start in signing up customers, Tate said Florida shouldn't have much difficulty catching up. The stock market's lousy performance over the past two years means other plans are not in a position to brag about great results. In addition, Florida already has forged strong relationships with thousands of college savers.

The prepaid program is a way to lock in the cost of some expenses at a state university or community college at today's prices. Many people buy only a tuition plan, which covers less than 20 percent of the cost for students who live away from home while attending a state university. If they attend a private college or go out of state, they can use the prepaid plan, but its value won't make much of a dent in the higher costs.

Nationally, the average yearly cost of tuition, fees, room and board for an in-state student at a four-year public university is $9,663, according to statistics compiled by the College Board. Go to a private college, and you'll spend an average of $25,052. At both public and private colleges, add at least $700 a year for books and expect to kick in $3,000 or so for miscellaneous expenses. In Florida, tuition costs at public universities are below average, but other expenses are just as high, or higher since many students drive cars to class.

Of course a thrifty freshman in Pinellas County could live at home and attend St. Petersburg College, where tuition and fees are just $1,628 this year (calculated on 15 hours each semester). But the official price tag for a year at Stanford University in California is $39,106, of which $27,204 is tuition.

And costs go up every year.

"With the high cost of college and the inflation of this cost, I believe that any who can do either plan should," said Robert Ferraro, 49, a Palm Harbor accountant. He bought the prepaid plan eight years ago for his two children, who are now teenagers. "I would consider the new 529 plan if I was saving for a young child, giving the money I invested the chance to grow long term."

While the potential tax benefits are largest for those signing up young children, even older children may benefit because the investment plan can be used to pay costs for graduate or professional school.

No matter which plan you use, the withdrawals are tax-free as long as the student has sufficient qualifying expenses. Expenses paid for by a scholarship cannot be counted as qualifying expenses. However, prepaid plan students who receive a scholarship can use their prepaid money tax free to pay for housing or other qualifying expenses.

Using both plans not only covers more of the cost of college, it offers diversification. The prepaid plan is safe and state-guaranteed, like a government bond that matures when you need to spend the money. The investment plan offers five mutual-fund-style investment options. A college saver can choose funds that invest in stocks, bonds, a money-market account or a combination of those. One fund allocates money to stocks and bonds based on the child's age, becoming more conservative as college enrollment approaches.

The tradeoff is that the investment plan carries more risk. You can lose money in stocks and bonds, so the value of an account can go down.

"I like the prepaid plan because it is a conservative option; I didn't have to worry about it as the stock market deteriorated," said Gena Cox, 41, an organizational development consultant. "The College Investment Plan is complementary because of the opportunity to increase my principal and the opportunity to use the funds for a broader range of college-related expenses. For me, it makes sense to diversify using both."

But the extra risk is a definite drawback for some college savers.

"For a wealthy family, the 529 (investment plan) might be a better plan, but for me the prepaid plan offers more peace of mind," said Rob Williams, 42, a St. Petersburg bartender and carpenter. He purchased a tuition plan for his son, Robbie, 11, and is now making installment payments on dormitory and fee plans.

Yet Cheryl Hadley, 31, of St. Petersburg, said she considers the investment plan more affordable for low-income families who don't have the lump sum required to buy a prepaid plan and find it difficult to commit to the alternative of monthly installment payments. A four-year university tuition plan costs $8,241 as a lump sum, $173 a month under a 55-month payment plan or $64 a month under a plan that extends payments over 18 years.

Hadley, an unemployed mother of two, said she tried making installment payments on the prepaid plan but had to drop out.

"The (investment) plan offers the flexibility of being able to increase or decrease monthly contributions over time depending on financial ability," she said. "It further allows for other family members to make periodic contributions, which is an attractive idea for birthdays and holidays."

People who like the discipline of automatic savings can sign up to fund their plans through automatic drafts from a bank account or through payroll deduction if they work for a participating employer.

Grandparents are big contributors to all types of college savings plans. James Geoghagan, 78, of Tampa, covered tuition and fees for his granddaughter, Phoebe Terry, 11.

"I started when she was born, buying a $100 savings bond every month," he said. "Then I thought this prepaid program was better than the bond program, so I bought it."

Geoghagan, a retired Army master sergeant, said he never completed college, but wants to be sure Phoebe has the opportunity. Why?

"Because I love her," he said. "She's special."

Liz Alonso, 61, of Wesley Chapel, has purchased prepaid tuition contracts for eight of her grandchildren and plans to buy another for No. 9, who was born last month.

"I just wanted to do something that when they got big, they could say their grandmother did it for them," she said. "I think it's a really fabulous program."

Alonso, a real estate agent, said she will not open accounts with the new investment plan because she already has another type of investment account for each grandchild. She opened Coverdell Education Savings Accounts, formerly known as Education IRAs.

"Instead of giving them toys when birthdays or Christmas roll around, I buy a stock for them," she said. "I let them pick the first stock and I thought it would be another learning experience for them."

The accounts offer similar tax advantages to 529 plans, but are more flexible in some ways. The money can be used for private school tuition for younger students. However, contributions to those accounts are limited to $2,000 a year.

Florida grandparents can use the new investment plan or a Coverdell account to benefit out-of-state grandchildren, who are not eligible for the prepaid plan. The investment plan even can be used to benefit children who are not yet born. Parents or grandparents can name themselves as an account's initial beneficiary, changing after the child is born. Generally, beneficiary changes within the family are permitted.

Money that ends up not being used for college can be withdrawn, although regular income taxes and a 10 percent penalty will be assessed on investment earnings.

For the wealthiest grandparents, investment plans like Florida's new plan are appealing because of their generous limits on contributions. They make it possible to remove a large chunk of money from an estate _ up to $283,000 in the Florida plan _ without giving up control.

Florida's plan is flexible in several respects, including the ability to transfer in money from another state's investment plan or from a minor child's bank account. Rolling over a prepaid account to an investment account is not permitted.

"It looks like they've tried to make it as flexible as possible," said author Joseph Hurley, who rates 529 plans on his Web site ( He is not a big fan of the prepaid plan, citing its rules and restrictions, but has not yet rated Florida's new investment plan.

"I have to see how it operates before I can rate it," he said.

Hurley said the investment plan's annual management fee (0.75 percent of the account value) is below average, but that the $50 application fee, which both plans charge, could discourage participation.

"There may be a significant number of people who are turned off by the enrollment fee since so many other programs don't have one," he said.

While many investors are more comfortable keeping their money close to home, there is no reason Florida residents should not consider other states' savings plans.

That is especially true if the intended beneficiary lives in another state with a state income tax. Many states offer tax incentives to residents who participate in their own plans. Since Florida has no income tax, the only state tax benefit the plans offer is exemption from the intangibles tax.

Information about the new Florida plans is available on the Internet ( or by calling toll-free (800) 552-4723.

_ Helen Huntley can be reached at or (727) 893-8230.

Saving for college

Here are some Internet resources on saving for college:

+ Florida Prepaid College Plan and Florida College Investment Plan (

+ "Evaluating Section 529 Savings Options," Better Investing magazine, National Association of Investors Corporation ( articles/bi/289/4077)

+ "Smart Saving for College _ 529 Plans and Other College Savings Options," National Association of Securities Dealers (

+ "Help! I Am a Parent of College-Bound Children," Investor Protection Trust ( college.htm)

+ "A Guide to Understanding 529 Plans," Investment Company Institute (

+ The Internet Guide to 529 Plans (

+ College Savings Plan Network (