By: Cameron Diehl, CFP^®

Friends – The full analysis below will take more than a minute to read, but I think it’s an important topic and of interest to many of you, so I wanted to elaborate a bit.

For parents (or grandparents) with young children, saving for college is one of their most important, and daunting, financial goals. I have conversations on this topic frequently with clients and one of the most common questions is: “Should we purchase a Florida Prepaid College Plan or invest through a 529 Savings Plan for our kids’ education?”

And my answer, as with most questions of that nature, is “It depends.” Both options offer a lot of advantages and can be a great fit, depending on your circumstances. And they’re not the only options out there. Deciding how you save for your child’s education is a nuanced, personal process and one that should involve careful discussion and analysis.

That being said, I wanted to share a brief comparison of some of the main features of these two options. This is by no means an exhaustive assessment of either, but is intended to help frame your thinking and start the conversation.

Both options offer specific advantages when saving for future college costs.

Florida Prepaid Plans offer a way to pay toward a future college education while locking in current tuition rates. You just pay the cost of the plan you select and your student’s future college costs are covered, no matter how much they rise between now and then. There are a number of different plan options to save toward the costs of tuition at Florida Colleges or Universities and a separate Dormitory Plan. 529 Savings Plans are essentially investment accounts sponsored by states that allow you to save and invest toward future college expenses with a number of tax advantages, including tax-free withdrawals for qualified education expenses. In some states, a state income tax deduction is given for contributions invested in your state of residence’s plan, though you can invest in any 529, regardless of your state. Because we don’t have a state income tax in Florida, it makes sense to look at different 529s and find the best option for your situation.

While each can help cover future tuition, housing costs and other fees, 529s can be used more broadly for other expenses as well.

Funds in a 529 can be used for any qualified education expense at any institution that is eligible for Federal student loans. This is extremely broad, with no limits based on in-state or out-of-state, public vs. private, etc. and includes all of the costs discussed above. Additionally, recent tax legislation has expanded the use of 529 funds beyond college costs, allowing them to help fund some K-12 tuition expenses. Florida Prepaid Plans cover tuition and most fees to attend an in-state, public Florida college or university. If your student elects to attend a private or out-of-state school, you can receive the equivalent value of attending a public Florida university to put toward their education. The Florida Prepaid Dormitory Plans, which are purchased separately, are a bit more restrictive, requiring students to choose from a number of university-held housing options, unless no such options are available.

529s project a lower total cost based on assumed rates of return.

To compare the costs of funding a future education via these two options, I compared the lump sum cost of purchasing a 4-Year Florida University Prepaid Plan along with a Dormitory Plan for a newborn using 2017 costs vs. a Raymond James calculator’s recommended lump sum investment in a 529 plan for a newborn to attend the University of Florida at the same time. The initial result was extremely close, with Florida Prepaid costing $59,779 vs. $60,129 in the 529. Notably, however, is the Florida Prepaid cost does not account for meals, books or other supplies, which can be significant, whereas the 529 estimate does. Meals alone at University of Florida can run up to $4,470 per year in today’s dollars. Adding in costs for computers, phones, clothes and other living expenses can drive both numbers higher. All of these figures are constantly changing as well, so it’s important to check in on your progress regularly.

The returns in Florida Prepaid Plans are guaranteed while 529s are subject to the performance of their underlying investments.

In terms of how each of these options performs as an investment, Florida Prepaid Plans are guaranteed by the state to perform at exactly the rate of inflation in costs to attend Florida state schools. This rate was legislatively capped at 6% in 2014 (down from a 15% cap) though the actual rate has been lower in recent years. The cap does not apply to other costs like books and computers, which are not covered by Florida Prepaid. The calculator I used for the 529 figure assumes an annual return of 6.82%, which is a conservative estimate of long-term returns in a diversified growth portfolio. These returns are not guaranteed however, so investing in a 529 does involve an added level of risk on that front.

529s generally offer a more flexible way to save at your own pace.

With high contribution limits and no required ongoing payments, 529s can be funded in whatever manner you choose, either in a lump sum, on a regular basis, consistently or in spurts as your budget allows. They can also be opened at any time. Florida Prepaid Plans require regular payments and must be purchased during an annual open enrollment period. Florida Prepaid Plans can also go into default if you fail to make a payment within 15 days of your due date. Plans can be reinstated within 180 days, though late payment, termination and/or reinstatement fees may apply.

Each provides a number of options if you don’t need the full value for one reason or another.

You can withdraw your funds from a 529 at any time for a nonqualified expense though you will pay taxes and a 10% penalty on earnings. There are other options, however, with the penalty waived in the case that your student receives a scholarship, as well as in the case of death or disability. You also have the ability to change the beneficiary on your 529 to another family member who may have a need or hang on to the funds in the case that your student may pursue graduate school or additional education. Florida Prepaid Plans offer similar options to change beneficiaries or receive refunds in the case of scholarship, death or disability. There are a few differences, however, in how much you can get refunded depending on a number of circumstances as well as how long you can extend your contract through beneficiary changes. However, in some situations with Prepaid Plans, you may end up getting back only what you put in originally, missing out on potentially 18 years of interest and appreciation.

For many, a combination of the two may be the best fit, especially with multiple kids.

Given the pros and cons of each of these two options, and most investors’ desire to diversify risks, combining the two is often an appealing choice. For example, you may purchase a Florida Prepaid Plan to lock in future tuition and fees and open a 529 to supplement these savings and help cover additional charges that the core Prepaid Plans do not, including room, board, books and technology costs. This type of approach may be even more appealing for parents with multiple children who want to choose complementary strategies while maintaining some flexibility given a wide range of possibilities for how your kids will end up approaching their educations.

At the end of the day, if you’re planning ahead and saving money toward your child’s education, you’re already doing great, regardless of how you go about it.

And these are just two of the ways to do so. However, each offers a number of advantages to help reach what can be a rather daunting goal, and each can be a good fit, depending on your approach and circumstances. Florida Prepaid Plans are a good, safer option to cover the base costs of an education without worrying about how the markets perform over time or how much costs rise in the future. They also can help keep you on track by requiring you to make regular payments to keep your plan in good standing. 529s offer significant flexibility, tax savings and potential upside to the extent you are comfortable with the uncertain nature that any investment brings. When opening a 529, it is also important to consider your own level of discipline to consistently save without being required to do so.

If you are planning for a child’s future education and would like to discuss the information covered above, please don’t hesitate to call or email me. I’m always happy to help.

Sources: Florida Prepaid College Board, University of Florida, Internal Revenue Service, MoneyGuidePro, Raymond James.

Any opinions are those of Cameron Diehl and not necessarily those of RJ&A or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. These calculators are hypothetical examples used for illustrative purposes and do not represent the performance of any specific investment or product. Rates of return will vary over time, particularly for long term investments. Investments offering the potential for higher rates of return also involve a higher degree of risk of loss. Actual results will vary. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJ&A, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Rules and laws governing 529 plans are varied and subject to change. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state. Certain changes in beneficiary may result in a taxable event. Tax-free withdrawals may be made for qualified education expenses. Otherwise, the deferred earnings portion may be subject to taxes and a 10% penalty. Please consult a qualified tax professional to discuss tax matters.