Prepaid college plans: Yes or no?
Enrollment is down and prices have surged along with tuition; some parents are considering 529 savings plans
Published: Sunday, January 23, 2011 at 6:01 a.m.
Last Modified: Sunday, January 23, 2011 at 10:18 a.m.
Alden and Kelly Kooken already face the challenge of raising a 5-year-old and 3½-year-old twins, but that challenge will take on a new dimension in 2025.
FLORIDA PREPAID COLLEGE PLANS
Prices for the current enrollment period, which ends Jan. 31. Dormitory plans are sold separately.
(Plan, lump sum/monthly cost for newborn)
4-year university plan: $45,367/$282
2 + 2 plan: $30,703/$190
4-year college plan: $16,514/$100
2-year college plan: $7,675/$46
Four-year university plans bought before Jan. 31, 2007, were exempt from tuition differential, the amount that individual universities can raise tuition beyond the statewide increase approved for all schools. A differential contract was introduced in 2007 to cover those costs, but this year was merged with the main plan.
(Four-year plan; differential contract if offered)
2007-08: $13,516; $4,614
2008-09: $14,360; $4,614
2009-10: $16,648; $19,756
Figures rounded. Source: Florida Prepaid College Board
All three children could be in college simultaneously, during a time when tuition likely will be dramatically higher than today. So the couple recently decided to buy three Florida Prepaid College Plans, which cost more than $600 a month total but ensure their children's educations are funded.
"We don't think we can afford it otherwise," said Kelly Kooken, 33, of Gainesville.
For families interested in paying this year's prices for a prepaid plan, there's a little more than a week left to do so. The current enrollment period ends on Jan. 31, before starting back in October under new and higher rates.
Since the prepaid program's inception in 1987, more than 1.4 million plans have been bought for nearly 957,000 children.
With Florida tuition being near the lowest in the country for years, the program has offered an even more affordable way to start paying those costs early. But fewer parents are buying prepaid plans, with some looking to options that are riskier but potentially a better investment, such as 529 savings plans.
With tuition at the University of Florida and other state universities rising 15 percent annually on the way to the national average, prepaid prices have skyrocketed. The lump-sum cost of a four-year university plan for a newborn was about $7,000 a decade ago. Today, it's more than $45,000.
"You're paying a premium to get into the plan," said Joseph Hurley, who wrote a book on college plans and founded Savingforcollege.com.
The current Florida Prepaid plans offer more than ever before by including fees for the first time, but part of the reason for the huge increase is those fees are rising rapidly along with tuition. Now the only supplemental plan is for parents who want to cover the cost of dormitories.
The program previously also had sold separate plans for fees and the so-called tuition differential, the latter being the amount individual universities can raise tuition beyond the statewide increase approved for all schools. Selling the plans separately caused some confusion among parents, said Susan James, spokeswoman for the program.
"It makes sense to sell those plans combined," she said.
In another first, the prepaid program is selling four-year plans that cover tuition and fees at state colleges that used to be community colleges. In recent years the colleges have started offering bachelor's degrees.
At a cost of about $100 a month, James said the plan is already the program's second-biggest seller.
"I think what's happening is people are looking at the value of it," she said.
If a student decides to go to an out-of-state or private school, the plan would transfer an amount equal to the average rates payable to Florida state universities and colleges to the eligible institution. And if the student earns a scholarship or delays college, the plan proceeds could be used to fully cover expenses or be transferred to another child, or a scholarship refund could be requested.
Overall, the number of new prepaid plans sold is down 18 percent from the previous year when comparing the Oct. 18-to-Dec. 31 parts of the enrollment period. With costs rising, parents must face the question of whether 529 savings plans offer a better investment.
Those plans, named after section 529 of the tax code, which exempts their earnings from taxes, are similar to 401(k) plans and other retirement accounts that fluctuate depending on investments. Florida Prepaid offers such a plan with several different investment options, while other states have their own plans.
Hurley said parents must decide whether they prefer the security of locking in costs in a prepaid plan or face a risk and uncertain reward of the savings plans. "The only way to know is in hindsight," he said. "You're going to need a crystal ball to make that decision."
For the Kookens, they decided to buy a prepaid plan for the security of the investment. They bought a 2+2 plan, which pays for two years at a state college and two years at a university.
Kelly Kooken said the monthly costs are significant for her and her husband, who works in operations for Target, so she asks relatives to contribute in lieu of birthday and Christmas gifts.
"It's time to do it, because you never know what's going to happen in the future," she said.
Contact Nathan Crabbe at 338-3176 or firstname.lastname@example.org.
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