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Prepaid 101: Saving for college

As enrollment started Monday in this year's Florida Prepaid College Plans, certified financial planner Meg Green said people with limited resources might find prepaying for college "a safer bet'' but other types of plans could save parents more money in the long run, though they involve more risk.

For many parents trying to guarantee their children a college education during these uncertain economic times, the stakes could be huge -- and complicated.

"There are a lot of different ways to save,'' said Green, whose office is in Aventura. "The two really good ways are the prepaid plans'' that guarantee prices at a particular group of schools, and savings plans that put aside tax-free money that can cover a much broader range of expenses.
Susan James, a spokeswoman for the Florida Prepaid program, said enrollment began Monday with a bang.
"We've had a very robust day,'' with questions pouring in, she said. Here are some answers about paying for college from the Florida Prepaid College Plans, Meg Green and the Securities and Exchange Commission.
Q: What are new options this year?
A: For the first time, you can prepay tuition at a "state'' college -- a former community college now offering four-year degrees. Previously, the only options for such schools was a "2+2'' plan for students who planned to transfer to a state university after two years or a two-year plan for students planning for only an associate degree. The option to prepay for a four-year degree at a state university is still available, and it is the most popular option.
Q: What's the risk?
A: Not much. Students have 10 years after their estimated admission date to use the funds. If they don't use the money, it will be returned, minus a $50 enrollment fee if they've had the plan less than two years. The hitch: You don't get any interest. You can also transfer the account to another qualified family member. If the student goes to a private or out-of-state college, the money can be transferred in the amount equal to average rates payable to Florida state schools.
Q: Does getting a prepaid plan guarantee a student admission to college?
A: No.
Q: I have a 5-year-old. What are my options for spreading out payments for prepaid?
A: For a child of any age, the options are the same: A one-time payment due on April 2011 to lock in present rates; a five-year plan of 55 equal payments; or monthly payments starting in April and ending in the October of the year the child is expected to start college.
For a 5-year-old being signed up this year for the four-year university plan, that works out to $42,315 for lump sum, $791 monthly for the five-year plan and $334 for the straight monthly plan. For a seventh-grader, the payments would be $38,108, $713 or $593.
Q: What other options do parents have saving for college?
A: Plenty, including standard certificates of deposits and gifts to minors. If they're interested in protecting the savings from taxes, the best bet may be a 529 plan. There are two basic types. One locks in tuition prices, like Florida Prepaid. The other is a college savings plan, which operates much like a 401(k), with the investment rising or falling depending on the economy and the parents' wisdom (or luck).
Unlike prepaid, savings plans are not guaranteed and it's possible the investor could lose everything. Still, the savings plans don't limit a student to particular schools, and some allow parents to sock away a ton of money -- more than $200,000 in some plans, according to the Securities and Exchange Commission website.
Green said an additional advantage of the general savings plan is that it can be used to cover a broad range of college expenses -- laptops, travel to school, housing and meals. Prepaid generally covers only tuition and some fees.
Any earnings in a college savings account are tax-free, and there is no charge when funds are withdrawn, as long as they're spent on education.
"If people have the money to set aside, it might be smart to do both a prepaid and a savings plan,'' Green said. "That could cover everything.''
Savingforcollege.com has a wealth of information about these plans and other ways to save for college.
Q. With this year's prepaid plan covering tuition differentials and all sorts of things, how does that affect my child if I already signed up in the past?
A: It doesn't. If you signed up in the past, you still have the option to pay separately for tuition, the tuition differential -- which covers increases in tuition rates -- and fees. If you signed up before 2007, you do not have to pay the tuition differential at all -- you locked in rates before dramatic tuition increases. This year, all the plans include payment for fees, tuition and tuition increases combined.
Q: I bought a plan for my teenager several years ago. I have another child and now it's costing me much more money. Why is this?
A: Tuition prices are rising. Parents lock in prices the year they enroll in the program. In the last two years alone, many state schools have raised tuition by 15 percent.
Q: How do I enroll?
A: Go to myfloridaprepaid.com or call 800-552-4723.

Q: When does enrollment end this year?

A: To lock in the 2010 prepaid rates, the application must be submitted by midnight, Jan. 31, 2011. For 529 college savings plans, enrollment can be done at any time.
More questions? Plenty of answers at myfloridaprepaid.com.
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