Smart ways to save for a college education

Paying for a child’s college education is a challenge for most South Florida families. But you can reduce your financial stress by taking advantage of several programs designed to help you meet those expenses in advance.

A college education today can easily cost $100,000 or more, considering tuition, fees, books, housing, food and miscellaneous expenses. The average cost of tuition and fees alone for the 2017–2018 school year was $34,740 at private colleges, $9,970 for state residents at public colleges, and $25,620 for out-of-state residents attending public universities, according to the College Board.

So, it’s a good idea to start saving for college as soon as possible. One basic approach is to increase the amount of money you are setting aside every month. If you dedicate $100 a month to savings and investments, perhaps you could double that to $200 a month. The advantage of this strategy is flexibility because you can decide when and to use those funds. But if you need to withdraw money for other purposes, your child will have a much smaller college education fund.

▪ Prepaid college plan: A second approach is a prepaid college plan. Basically, you make monthly payments in advance or purchase it with a lump sum payment. When your child goes off to school, the plan will cover the lion’s share of those college expenses.

According to myfloridaprepaid.com, more than 1 million families have signed up for the Florida Prepaid College Plan, making it the largest such program in the nation. Monthly payment options vary from year to year, but are typically based on your child’s age. It’s less expensive to buy a plan for a younger child whose college expenses are many years in the future.

The Florida prepaid plan gives you several choices in regard to what expenses to cover. For instance, you might want to pay for four years of tuition and fees, or perhaps add a year of room and board costs since most freshman students live on campus in a dormitory.

From an investment perspective, there are three very positive features of the Florida program. First of all, every prepaid plan is guaranteed by the state, so you don’t have to worry about losing your investment. Second, by purchasing a prepaid plan, you lock in your child’s college expenses. No matter how much tuition, fees, housing or other costs rise in the next few years, your expenses won’t change.

For instance, if the state raises college or university tuition by 10 percent next year, your prepaid plan will cover that increase. Locking in those costs in advance is a definite advantage compared with saving and investing the money yourself.

Third, a Florida prepaid plan lets you apply your savings to out-of-state institutions. And if your child doesn’t go to college, you withdraw those funds for other purposes.

▪ A 529 plan: You might also want to consider a 529 Savings Plan as an alternative or a supplement to a prepaid college plan. This program, named after a provision in the Internal Revenue Code, allows your investment earnings to grow tax-free. That means that your contributions have the potential to increase more quickly than in a taxable savings or investment account.

The Florida 529 Savings Plan offers a flexible approach in order to accommodate different financial goals. Unlike a prepaid plan with a fixed monthly payment, you can contribute varying amounts, based on your changing financial circumstances. On the other hand, the funds you invest in a 529 plan are not guaranteed by the state, and a market downturn could have a negative impact on your investments.

One of the appealing features of a 529 plan is that grandparents, aunts, uncles or other family members can also contribute to your child’s college education. Instead or buying a new toy or game for a young child, for instance, a family member could make a $25, $50 or $100 contribution to college.

Another major advantage of a 529 plan is that it can cover a wide range of educational costs, such as books and supplies, as well as tuition and fees or room and board. That means the money you contribute to the plan can help pay for expenses that are not covered by a prepaid plan. Finally, the funds you put into a 529 plan can be used at any qualified public or private educational institution in the country.

With college costs likely to rise in the future, it makes sense to consider financial options like a prepaid plan or a 529 plan that can help you cover the expenses of your child’s education. A tax advisor should always be consulted when considering an investment in a college savings plan so that you fully understand all of the associated tax benefits and implications.

This story was originally published March 1, 2019 at 1:19 AM with the headline "Smart ways to save for a college education."