YOUR MONEY: Pre-paid college tuition offers big savingsMention that you need to start saving for your child's college tuition and you will hear the same advice from many financial planners: Pay for it in advance.
By: Nirvi Shah, McClatchy Newspapers
MIAMI — Mention that you need to start saving for your child's college tuition and you will hear the same advice from many financial planners: Pay for it in advance.
"Step 1 is, if you can lock in your costs at today's prices, do it," said Cathy Pareto, a certified financial planner in Coral Gables, Fla.
That's because the costs of college are rising at a staggering pace — and far faster than the rate of inflation, Pareto said.
Just this year, the state raised tuition at all public universities by 8 percent. Then every university raised tuition another 7 percent — a one-year increase of 15 percent.
While Florida universities are still among the cheapest in the country, tuition at Florida State University, for example, has increased 400 percent over the last 18 years — from about $4,000 back then to about $16,000 this year.
You can enroll in the Florida Prepaid College Plan all year long, but starting Monday, through Jan. 31, parents who sign up will lock in 2009-2010 tuition rates. The first payment is due in April. If you sign up after Jan. 31, you will be prepaying at the 2010-2011 rate.
At private universities, the price of tuition is growing at an average of 6 percent per year. There is a prepaid program for some of these schools too, the Independent 529 Plan, which was created by a group of more than 270 schools across the country. Both plans work in a similar way and the private plan can also save thousands in the long run. But the upfront costs are steeper than Florida's, reflecting the pricier tuition at participating schools.
For example, if you have a child who is 1 this year and will start college at a public university in Florida in 2026, you could pay off four years of their tuition and a lot of the anticipated fees this year with a single payment of $38,837. Putting that same amount into the Independent 529 plan would buy about one year of tuition at Duke University 17 years from now.
Florida prepayers can lock in the cost of dorms, athletic, activity and health fees and a newer feature, tuition differential fees — which pay for enhancements to public university curriculum.
But even if you prepay all of these items, the state estimates this will still leave students with about half their college expenses unpaid. These costs include books, transportation, food and lab fees.
The private school plan gets its name from a section of the federal tax code. A 529 plan can refer to a prepaid program in which the tuition is guaranteed to be covered, like Florida's, or college savings plans, in which investors manage their own accounts and there is no guarantee of the plan's worth at the time a child is ready to go to school.
That's another reason Pareto recommends the prepaid plans.
"You're locking in the cost. Someone else is assuming the risk of the investment — and there is no annual fee," she said.
For Christine Acosta, securing college tuition for her four boys was a no-brainer. Since first enrolling Zachary, 11, the Miami family has signed up Austin, 9, Matthew, 5, and Owen, 1.
"You're not going to lose your money," Acosta said. And she has no doubt all four of her kids will get an education beyond high school. She and her husband are first-generation Americans whose parents came to the United States from Cuba.
"Education, that's the only thing you take with you — since we were little, we were hearing that," she said. "It's the best thing we can do for our kids."
One big drawback of prepaid plans is that you sock money away and your child ends up at a school the plan doesn't cover. Or if your child doesn't go to college.
Todd Templin of Pembroke Pines, Fla., wonders whether his son and daughter — whom he enrolled in the Florida prepaid program five years ago — will stay in state for school.
Troy, 17, is a junior in high school and a member of the football team. Athletics may nudge him out of state.
"It may be that he'll want to go to a smaller school up north," Templin said, though he has no regrets — except that he wishes he had enrolled his children when they were younger.
"I could really kick myself for waiting for so long," he said.
If Troy or Kelsie, a freshman, decide a Florida school isn't for them, the money accumulated in the prepaid account can be transferred to another school — although it may not go as far. It also pays tuition in full at many vocational and technical schools in Florida, said Caitlin Levens, a spokeswoman for the program.
Another way of thinking of prepaid tuition: "It's like buying insurance," said Helen Simon, a certified financial planner and finance professor at Florida International University.
Once you enroll, she said, you're really locked in to current prices—even if you move out of state.
One of Simon's friends moved from Florida to Rome when her son was young. Had she enrolled her son back then, he would be paying in-state tuition at the prices of yesteryear. Instead, her son will pay tuition at the current rates — for international students.
Although prepaid plans are intended to be risk-free, several other states, including Alabama, have had to close enrollment in their prepaid plans in recent years because investments didn't hold up to the plan's expenses.
Florida's 20-year-old program, one of the largest in the country, hasn't experienced those problems, despite the ups and downs in the market in the last few years. And the most popular version of Florida's plan, which allows prepayment for four years of tuition, is guaranteed by state law to be paid,.
The state also offers the option of prepaying community college tuition and for a combination of community college and university tuition. The independent plan for private universities only allows prepayment of tuition and fees, said Nancy Farmer, CEO of the organization that oversees the private plan.
Templin is banking on other savings plans to pay for some of these expenses. He also hopes his kids will get scholarships.
If they do, that doesn't mean the money he prepaid will be wasted. Now that the Bright Futures scholarship program is a flat award, rather than covering the entire cost of tuition, students can combine their prepaid money with the scholarship to cover more of their college expenses. Students who receive scholarships can ask for a scholarship refund or transfer the prepaid money into a sibling's name. If the plan isn't used, it can be refunded in full.
"Most people put it right back into all of those miscellaneous expenses," Levens said. "That was my personal experience."