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Lisa J. Montano CPA, PA

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Saving For College – Get Started and Then Stick With It!

September 21st, 2011

Here’s my personal experience with saving for our children’s college education and how it is actually playing out.  We have two kids, each attending a different public university in the State of Florida.  From early on, we’ve considered college a natural progression from high school.  There was never any question as to whether or not they would attend.  You could say it’s been a high priority to us.  It hasn’t always been that way.  I’m a first generation college graduate, and my husband has a two-year technical degree.  I guess we’ve always felt it was our responsibility to provide the gift of education to any child that God might bless us with. 

We can have a lengthy discussion of which savings plan is best.  There are many options to choose from:

Uniform Transfers To Minors Accounts (UTMA):  This is the traditional way to save.  No tax breaks.  Income taxes apply (Above $950 of earnings, the child has to pay taxes…at the child’s tax rate; above $1,900, the child has to pay at the parent’s tax rate.)  At age 21 (18 in some states) the child gets full control of the money (to use for anything).

Coverdell Education Savings Accounts: Earnings accumulate tax-free.  No taxes on withdrawals if they’re used for qualified education expenses.  The most you can stash away is $2,000 per year.  There are limits on contributions by high-income earners.

529 Plans:  These state-sponsored programs are the favorite of many.  You do not necessarily have to live in the state program you select.  Like a Coverdell, the account grows without earning any taxes, and withdrawals for college purposes are tax-free.  No income limits.  If you wish, you can even bunch up to 5 years worth of contributions ($65,000) in one year, without exceeding your annual gift-tax exclusion.

Prepaid College Programs:  These are state sponsored programs that allow you to prepay college tuition, dormitory, and other college costs.  Rates increase the later you start the program (because the child is older and closer to using the funds).  There are some strings attached, it is not as flexible as a 529 plan.  However, the tuition is fixed at the amount you contract. 

My Story:  Our youngest daughter turned 7 and was entering the second grade (her sister was 9, going into fourth grade) when I realized it was late already.  We hadn’t started any higher education savings plan.  I knew in my heart and in my head that was wrong.  The pressure was on to start something before it was too late and too expensive.  Having already been debt deep in mortgage and other payments (obviously, this was a period of time prior to me becoming a financial adviser!!), we opted for the Florida Prepaid College Plan, which, unlike the other formats, offered something we could rely on.  If we made the payments according to the contract, we’d be guaranteed the coverage.  After weighing all the pros and cons of each scenario, that was the most important feature for us. 

There were a few different prepaid plans to choose from.  Today there are even more. The plan we chose was called the 2+2 plan, meaning the tuition and fees associated with 60 credits at the community college followed by 60 credits at the 4 year university would be pre-paid.  We also included the 2 year dormitory plan.    Here’s a description of the contracts we entered (in 2000) and the current situation of each: 

Daughter  #1, started plan at Age 9: 115 monthly payments of $130; payments totaled approximately $15,000 over 9.5 years. 

Today:  Age 21 (Junior):  Since she entered the 4-year university as a freshman instead of attending community college for the first 2 years, the prepaid plan’s tuition portion is being used up at an accelerated pace.   We only had the 2 year dormitory plan, so now at the beginning of the third year, housing would have been an out of pocket cost, except the smarty pants went and got herself a part-time job in the leasing office of a privately owned/campus affiliated housing complex, where she’s been living rent-free since the beginning of this semester.  The annual Grandma Ada scholarship (contact me if you want to hear that story) helps with the cost of the books, and she’s figured out how to buy and resell them online.  A big part of her current life experience is learning how to draw from the bank account she’s worked so hard to grow since age 15.  I just hope she’s buying groceries once in awhile.  I’m feeling positive because we’ve been able to engage this child to participate in the process.  It seems to have a positive impact on her feelings of self worth and gaining confidence about moving forward.

Outlook:  During the Spring 2012 semester, the plan will be fully exhausted and there will be out of pocket costs associated with tuition and local fees beginning the following semester.  The State of Florida has a Bright Futures scholarship program for all high school students achieving certain GPA and test scores.  Budgetary constraints have reduced it from the beginning, it’s currently about $1,200 a semester for daughter #1.  This is a lot of money to her, and she seems to be able to bank most of it!   Although she’s pointed out recently her realization that she’d have been better off working her old on-campus job and paying the rent, if she keeps her job at the leasing office, the rent-free housing situation will continue.  Because she took a couple of courses online over the summer breaks, and earned a few college credits in high school by passing the advanced placement classes, it looks like she will earn her bachelor’s degree about a year from now.  So this means daughter #1 will graduate a semester earlier than the traditional 4 years, with very little out of pocket costs.  I’d venture to say that it looks like her college experience, at least in a financial sense, will be positive.  If she can escape all those luring offers from the credit card companies and actually get a job after graduation, we’ll really have something to celebrate.

Daughter #2, started plan at age 7: 139 monthly payments of $115; payments totaled approximately $16,000 over 11.5 years

Today:  In her first semester of college.  She too, has forgone the community college and enrolled directly in a 4-year university.  Accordingly, her prepaid plan will run out before she earns her degree, probably in the junior year.  Fortunately, due to her many high school advanced placement classes, she entered with over a full semester of college credits.  So, unless she takes too long to declare a major, this child should also be able to graduate early. 

Overall, I guess you could say my husband and I are happy little empty nesters right now; renewing our relationship and readying for our retirement years, that we really understand are just around the corner.    I suppose we could run simulations to see if we chose the right platform after all.  However, even without running any computerized scenarios, I know we made the right choice, for us.  The prepaid plan has worked in our favor, when you consider the discipline involved with the contract payments, the general market and economic conditions, and the twists and turns our lives have taken.

Most parents encourage their kids not to drop out of school.   Now I’m here to encourage you.  Don’t drop out on your long-term investment program, especially if you’re saving for a child’s (or grandchild’s) college education. 

I’d love to hear from you with any questions or ideas you might have.

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