Which is Better: Florida Prepaid or a 529 Plan?

Which is Better: Florida Prepaid or a 529 Plan?

February 05, 2019
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Fenn IV just had a birthday! Turning 2 is an exciting age; he is learning to count, he can sing his ABCs, and he is becoming more precocious than ever. As we begin to think about preschool the talk inevitably turns to college planning, (the joys of being married to a CFP®).

Our oldest son recently turned 8. When he was born Florida Prepaid was significantly more expensive than it is today. In 2015 costs for a newborn in Florida Prepaid dropped from $53,729 to $27,379.(1) This was due in part to House BIII 851 passed by Rick Scott in 2014.(2) In my opinion, when Alec was born 8 years ago, prepaid plans were grossly overpriced and we opted for a 529 plan. But a $30,000 price drop is an impressive amount.

Is this still the right choice for our youngest son?

To answer this question, I turned to our websitewealthadvtb.com to gather some data on current college planning, and Florida Prepaid atmyfloridaprepaid.com for current costs and plan options. Below is what I found. I hope it helps you in your decision-making process.

  • Initial Investment is based on a child at the age of 2
  • College inflation costs, based oncollegeboard.org inflation from 2007-2017 was 3.2%
  • Current Tuition of Florida Colleges (Florida Prepaid) (3)
    • University of Florida (Public) - $6,381
    • New College of Florida (Public) - $6,916
    • Average Florida 4 Year Public College - $3,877

UtilizingBank Rate - College Calculator(4), I input the above information. Based on a conservative growth assumption of 5.2% (average net return of 2%), the 529 Plan would have an extra $26,685. A significant benefit of 529 Plans is the flexibility to use these additional proceeds for other qualified education expenses. It is important to note that Room & Board are not included in the Prepaid Plan; as such they are left out of the expenses in the above calculation. However, if you would like that covered one could purchase an additional Florida Prepaid Dormitory Plan for $7,576.71.(5)

My wife and I spoke about the Pros and Cons of both plans. The Prepaid Plan does have the benefit of a guaranteed “price lock” to attend one of the 12 approved Florida Universities. However, in looking at the numbers it would seem that we are basically paying the full cost of college today. In the event of zero growth and extremely high inflation, there is the benefit that the price is locked in. But even with the marginal growth of 2%, we would come out much further ahead in the 529 Plan. We also liked the benefit that the 529 funds could be used for any accredited, vocational, or schools abroad. One final thing I wanted to look at was how much a Prepaid Plan would pay towards a private university, which you can see below by attending a private university there is a huge shortfall that was not planned for.

There are many variables parents should consider when planning for education expenses. A person’s risk profile and their desire for flexibility are two very important factors. In our case, we decided we liked the flexibility of the 529 Plan and were willing to accept some of the investment risk. However, each person is different. Please feel free to contact me with any questions about your particular circumstances.

Sources

1-https://www.tbo.com/news/education/parents-flock-to-states-lower-cost-pre-paid-college-plans-20150316/

2-https://www.myfloridaprepaid.com/new-law-will-significantly-lower-cost-florida-prepaid-college-plans/

3-https://www.collegetuitioncompare.com/compare/tables/?state=FL

4-https://www.bankrate.com/calculators/savings/saving-for-college-calculator.aspx

5-https://www.myfloridaprepaid.com/prepaid-plans/dormitory-plan/