College Savings: Florida prepaid vs 529. Which one is right for your family?

Having young children puts a great financial stress on parents, if parents don’t have a solid financial plan. I especially see it on friends that have young adults going through (or almost getting) to college now, and how much those friends are stressing about paying for school and school related expenses (College Savings and Expenses). In fact, a survey shows that 70% of parents surveyed did not have a set plan or a college investment account for their kids.

The truth is that you don’t have to stress about college!!

There are two thoughts I want to explain before we get to the article. First, I want to say that our parents did not plan, for either my wife and I, to help pay for education. We both had to work hard, pay as we went, and little by little stay at it to complete the education we wanted. Having no help from our parents was a valuable lesson for us and I am not going to minimize the impact that it had in our lives. This taught us arduous work, discipline, patience, and other qualities that no college can teach. Second, I do know that there are some advantages if we had a little help from our parents along the way, but unfortunately, they did not plan for that. We could have benefited, perhaps to enroll in a better college, or finish our education quicker, etc. Here is my point: there is a balance, that now as a parent, I want to be able to teach my kids. It is the balance of helping them, but also letting then work hard for what they want.

That is why my wife and I decided years ago, that we were going to save for college for our kids, but at the same time, we don’t want to pay for everything they need along the way. I think that is a good balance, to let them know both, that we thought about their future and we support them, but also that they need to work hard, and not be entitled brats that can have anything they want. I am not saying this will work for your family, but I think it is a good balance between both worlds!

That out of the way, in this article we will compare the two major plans we have in Florida (the State we live) between, Florida prepaid and the 529 education savings account.

Here are the three more important categories that they both have in common:

  1. Eligibility: They both can be started at pretty much any time. From a newborn to almost college age, both plans can be started anytime in between. Florida prepaid has specific enrollment dates, and can only be for kids under 11th grade, the 529 does not have any restriction on age or time.
  2. Coverage: Both plans cover pretty much any fees related to education. They both must be qualified expenses, like books, tuition, housing, etc. Florida prepaid however, has restrictions when it comes to housing (it can only be used for in school housing) while the 529 does not have those restrictions.
  3. Flexibility: Both plans allow you to use the money for qualified education expenses. If your child receives a scholarship, funds can be either used for other education expenses or refunded or withdrawn. The 529 plan will have some tax penalties if the money is not used for education.

Here are the two important categories where they differ:

  1. Logistics: Florida prepaid is only for Florida. Meaning people that want to enroll in the plan must be a Florida resident for at least 12 months. Since the funds are guaranteed by the State of Florida (they are protected by the Government) they can only be used for Florida colleges and universities (with some exceptions). The 529 plan can be used anywhere because they are not protected by the State and therefore they don’t have the same geographical restrictions.
  2. Financial considerations: There are two major financial considerations that people looking to open either account need to keep in mind: First, both plans’ earnings are tax free as long as they are used for qualified education expenses, however, the Florida prepaid can not be used for room and board outside of the school (a separate plan can be purchased for that), and the 529 plans don’t have those restrictions. Second, you can contribute different amounts to each plan with no limits, but the Florida prepaid does have set payment options. Therefore, you need to consider if these set options are right for you, and if your family can afford them. The 529 does not have those requirements, therefore you can set the amount to whatever fits your budget.

Florida prepaid

Pros:

  • Tuition costs are paid per current rates (not future rates) therefore saving you a little money
  • Protected by the State, and good for in State tuition
  • Earnings are tax free
  • Earnings can be refunded if child has a scholarship, or if the child decides not to go to college
  • Earnings can be transferred to another eligible child with no penalties

Cons:

  • Set times for enrollment and set payment options
  • You can contribute until your child is in 11th grade (nothing after)
  • To be used in the State of Florida
  • Does not cover external room and board (needs a separate plan for that)
  • Funds can only be used 10 years or less from the child’s projected college enrollment year (you pick that year when you do the application)

529 Plans

Pros:

  • Flexibility for enrollment and payment options
  • Does not have a time limit for you to contribute
  • Covers external room and board
  • Funds can be used nation wide
  • Earnings are tax free if used for qualified education expenses
  • Earnings can be transferred to another eligible child
  • No time limit to use the plan (can be used even as an adult)

Cons:

  • Tuition costs will be paid at future rates
  • The plan is not guaranteed (like any other investment plan, it has risks and therefore it is not guaranteed)
  • Earnings that are not used for education can be withdrawn but there might be some tax penalties if the funds are not used for education

If you ask me, I prefer the 529 plans, due to the freedom and flexibility the plans offer. Florida prepaid is a great option for Florida residents if the payment options they have fits your budget, and if you are sure your child will go to school in Florida.

Action Plan:

If you want to open a 529 plan, now is the time to do so!! Fidelity offers a great one and you can enroll HERE. Charles Schwab also offers one, you can enroll HERE. (We do not make any money from any of these affiliates, we recommend them because they offer, in our opinion, good plans and we personally use them) If you want to start a Florida prepaid plan click HERE.

There you have it! College Savings made easy: Florida prepaid vs 529 plans. I hope this information was helpful and that it made the process easier to help the little ones in your life. Enjoy!

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