Personal Finance

Make college affordable by saving early

Wayne Messam, mayor of Miramar, speaks before the 100 Black Men program started at the Frank C. Martin Middle School on March 3. He spoke about “BOLD” — Blessed, Obligated, Leadership, and Dare to be great.
Wayne Messam, mayor of Miramar, speaks before the 100 Black Men program started at the Frank C. Martin Middle School on March 3. He spoke about “BOLD” — Blessed, Obligated, Leadership, and Dare to be great. wmichot@miamiherald.com

As mother of twin college sophomores, Harriett Johnson Brackey says you can never save enough for college. As a wealth advisor, Brackey says, you can never save enough for college.

With tuition costs rising faster than inflation, most parents wish they started saving sooner, said Brackey, director of investments with GSK Wealth Advisors in Fort Lauderdale. “Parents look at the cost, come to me, and ask, ‘how are we going to get there?’ 

For the 2015-16 school year, the average annual cost of tuition and fees at a private, nonprofit, four-year university was $32,405. The average annual cost for a public university was lower — $9,410 nationwide at four-year schools for in-state tuition and $23,107 out of state, according to College Board. Those numbers represent about a 3 percent increase from the prior year according to College Board, a not-for-profit created to expand access to higher education.

Though Florida students pay less than the national average — about $6,500 per year at Florida State and $6,300 at University of Florida — most families still have to add in housing, which can run as much as $7,000 a year in Florida, plus meals and books.

In weighing options, many parents struggle with the questions my husband and I faced when our son wanted to attend a private, out-of-state college. Should we use our savings for retirement or to pay for his college tuition? Should we force our son to take out college loans that could have him graduate with mounds of debt?

“Remember, there are no loans for retirement,” Brackey says. “I don’t like college loans but no one is going to bail you out if you get to retirement and don’t have enough money to fund it.”

Ideally, you want to afford both. Mari Adam, a certified financial planner and president of Adam Financial Services in Boca Raton, believes when you plan early for your children’s college years, it can make a huge difference to your lifestyle in retirement. “Start as soon as possible. The sooner you save, the less you have to save because you are letting compounding do its work,” she said.

For parents without savings who find themselves choosing between helping a child with college tuition or affording retirement, Adam recommends choosing retirement. In those situations, community colleges might be a good, low-cost route to a higher education. “There are plenty of reasonable college options in Florida. There is no reason to get into trouble for retirement.”

Adam has found that people are more successful when they sign up for an automatic savings program rather than putting money into savings sporadically. They are also more successful when they start small and increase their contributions for college savings over time.

If your main goal is college savings, Adam said creating a savings account in a child’s name, known as a custodial account, is not the way to go. Any yearly earnings above $2,100 are taxed at the parents’ rate and all withdrawals face taxes on capital gains.

“The risks are your savings doesn’t grow or you lose to taxes or you lose financial aid,” she said.

Prepaid “529” plans

Instead, Adam advises parents — or family members — to put the money in a “529” college savings plan (named after an IRS tax code). Earnings in a 529 plan are exempt from federal taxes, meaning parents will not be taxed when the money is taken out to pay for college. The money can be used at a private or public college, university, graduate school, or vocational school anywhere in the country — not just Florida.

(It’s worth noting that if parents put money into a 529 plan and withdraw it for use other than higher education, it becomes subject to a 10 percent penalty and will be taxed on the amount considered profit.)

Such plans come with additional benefits. The money in 529 plans can be used not only to pay for tuition, books and room and board. New rules say the money now can be used also to pay for computers and related educational equipment.

Another big advantage with 529 plans is the account owner always maintains control. Your child gets listed as a beneficiary and that the beneficiary name can be switched later to another person, such as a younger sibling or even the parent. Family members such as grandparents can open a 529 plan and contribute to it tax free, too.

Today, at least 30 states offer 529 plans, including Florida, with a total of 100-plus options. You can open accounts in as many states as you want, although in most cases there is little reason to have accounts in more than one or two states.

When choosing among then, you’ll want to consider tax benefits, investment choice, fees and performance. Some of the most popular options are the age-based 529 plans, which automatically adjust the mix of investments to change the amount of risk as children get closer to college age. For guidance, the two most popular ratings systems are fund researcher Morningstar’s 529 plans annual industry survey and savingforcollege.com’s 5-Cap Ratings.

The Florida Prepaid College Savings Plan allowed Debra Levine, a single mother in Cooper City, to afford her son’s tuition. Levine purchased a Florida Prepaid Plan 18 years ago, shortly after her son, Zachary, was born. The cost of tuition at a Florida public university is now more than double the amount Levine paid. Zachary now is a freshman at University of Central Florida. “There are still expenses with books and meals and housing but at least tuition already was paid for.”

Prepaid plans like the one Levine bought allow parents to pay for their children’s college tuition by locking in prices at the time of purchase, thus protecting parents from big tuition hikes that may occur before their children head off to school. Florida’s is the largest, and one of the oldest prepaid tuition plans in the country and can be used at any of the state’s 12 public universities. Parents have the option to pay in a lump sum, over a 55-month term, or monthly until their child enters college. Florida also offers a university dormitory plan.

BEYOND FLORIDA BORDERS

Shannon Colavecchio, a spokeswoman for Florida Prepaid, noted an additional benefit: If your child attends a Florida university and receives a scholarship for high academic achievement, such as Bright Futures, the amount covered by the 4-Year Florida University Plan can be refunded or used to pay for tuition and fees not covered by the scholarship — even beyond what you actually paid in. And if the child moves out of Florida, the child remains eligible for Florida in-state tuition and fees while using his or her 4-Year Florida University Plan.

Unlike a standard 529 plan, prices are locked in and are not subject to market fluctuations.

“One of the big myths is that the prepaid plan can only be used in Florida,” Colavecchio said. “The reality is that you can apply value to any institution but it won’t go as far” at another institution.

For example, had Levine used the plan at a public or private university outside of Florida for the 2015-2016 school year, it would be worth between $95 and $116 per credit hour, depending on the plan she purchased. That would max out at $3,480 for 30 credit hours, leaving about $28,000 left to be paid toward the average cost of private university tuition.

To be sure, Florida Prepaid is most useful to parents whose children attend college in state. John Holian, president of Griffin Planning in Miami, has one daughter at University of Florida and another scheduled to attend a Florida university this fall. For him, Florida Prepaid eliminated the uncertainty that his daughters’ tuition would be covered when it was time for them to attend college. “It turned tuition into a fixed cost,” Holian said.

Although he might have been have been able to earn more on his investment by putting the same money into a 529 savings plan, he noted, he might also have seen the value drop because of the volatility in the market. “The prepaid plan was a guarantee,” Holian said.

BY-THE-YEAR OPTION

Now, the state has introduced a new 1-Year Florida University Plan that allows a parent to purchase one year of state university credit hours at a time, without feeling the financial pressure of having to buy all four years at once. Multiple people, such as parents and grandparents, also can buy a year for the same beneficiary, for a total of four plans per student. At this time, a one-year plan for 30 credit hours would cost $46 a month, Colavecchio said. “When a child knows there is money saved for college, he is more likely to attend and finish,” she said.

Even students with savings plans can apply for financial aid and scholarships or grants. Parents should approach those opportunities straightforwardly, Adam said. She advises being particularly cautious about advisors who encourage parents to move assets before applying for financial aid by transferring income into annuities or life insurance vehicles in which the advisor earns a commission. “Those are expensive solutions and once you are in them, they are hard to get out of without paying a penalty,” she said.

When considering financial aid, schools are looking at income, she said. “Hiding assets in those other vehicles has little impact on the lending formulas. What they are looking at is what you make.” There is another downside to moving assets: The money you do get from schools is typically in financial aid loans. “Don’t be fooled into thinking more financial aid is a good thing because most of the time it’s a loan that has to be paid back with interest.”

Prepaid plans aren’t the only vehicles for college savings. Roth IRAs also allow you to contribute after-tax money and withdraw funds tax- and penalty-free after five years to pay for qualifying educational expenses. If the child doesn’t go to college, that money still can be used for retirement.

Fidelity, for example, also offers a few options for college savings, both of which require a Fidelity account. One is a Visa card that offers cash back on purchases which gets directly deposited into a 529 savings account. The other is an American Express card that offers cash back when you directly deposit into your 529 account.

Despite the range of options, the percentage of families who are putting away money for their child’s college education, and the amount they’re saving, have both declined over the last five years. Only 36 percent of middle-income families and 29 percent of low-income families are putting money away for their kids’ college fund, according to a 2015 study by student loan company Sallie Mae.

Brackey said parents may want to consider asking their children to pay a part of college costs. “Personally I think students do better if they have some skin in the game,” Brackey said. “I think a little bit of contribution from the student hooks them into their college outcome.” Both of Brackey’s twin daughters, sophomores at two different private universities, have jobs on and off campus to contribute to their tuition cost.

Ultimately, planning for college in the smartest way possible isn’t just about your child. It’s about setting yourself up for your retirement years by investing in a way that your personal savings won’t need to be tapped or borrowing in a way that burdens your ability to live comfortably in the future.

“It’s important to make sure your child has realistic expectations about how much you are going to contribute to their college costs,” Adam said. “There are plenty of reasonable college options so your children don’t have to go into debt and you don’t have to sacrifice your retirement.”

SAVING FOR COLLEGE

As you plan ahead:

▪ Consider college savings by locking in tuition rates with Florida Prepaid. The enrollment period typically runs from mid-October to the end of February.

▪ Consider having family members pitch in with 1-year Florida Prepaid plans. Cost for those plans started last year at $46 per month.

▪ Compare various state 529 plans and choose one that matches your savings goals.

▪ Look into rewards programs that give cash back toward college savings such as Upromise and Fidelity Visa.

▪ Explore custodial savings accounts and Coverdell Education Savings Accounts (ESA) which offer a tax-deferred and tax-free savings option if used for education expenses, from kindergarten through college. (eligibility and contributions are limited).

As college gets close:

▪ Fill out a Free Application for Federal Student Aid (FASFA) form.

▪ Research grants, scholarships and loans.

▪ Compare tuition costs; consider a community college.

▪ Look into federal tax credits for higher education.

▪ Apply for financial aid at multiple colleges and from multiple funding sources (federal, state, institutional and private providers of assistance).

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