Prepaid College Savings Plan vs 529 College Savings Plan: Which is Better?

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Long before I started college, I knew I wanted to go and finish debt free. I grew up hearing about how expensive college was and how it could take years and years to pay off the loans depending on where you went to school and how far you wanted to go. The higher the degree, the higher the loan, the longer it takes to pay off. (Pray you get a good paying job after graduation.) Aside from scholarships and pell grants, loans were the only thing I’d heard of as a way to pay for college. So, if I had to get a loan, I was determined to make it as small as possible and pay it off as quickly as possible. After all, what other option is there? Right? If only I knew about prepaid college savings plans and 529 savings plans back then….

I worked a part -time job nearly every single semester while I was working on my undergraduate degree. Aside from one semester, I also lived at home, so I did not have to pay much for costly room and board or dorm fees. I got a partial scholarship and did take out a few loans to pay for my tuition, but I did not wait until I graduated to start paying them off. I started sending payments while I was still in school. By the time I graduated, I had less than $3K left to pay off. If I could give you a tip to paying for college: if you do have to take out a loan, do what you can to start paying it off right away. Don’t wait until after you graduate to start sending in those payments.

OK. Flash forward about 11 years… I’ve graduated. I’m working full-time. My college loans have been long paid off, and I’ve been consistently putting money into a savings account for 4 years to help my 4 year old pay for college later. Bonus tip number two: it’s never too early to start saving for college. I opened my son’s savings account when he was 2 months old. The 0.01% interest wasn’t exactly appealing, but at least he had some kind of a head start. Then, I got a little smarter.

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My son was about 3 years old when I first heard about the Florida Prepaid College Savings Plan from a co-worker. I was newly divorced, and she had been kind enough to tell me her story – a similar one to mine – and that her daughter was about to be a junior in high school doing an exhaustive search for scholarship opportunities when they came across information on prepaid college plans. Basically, as long as you submit an application to enroll in a prepaid account before the child enters the 11th grade, you can lock in the current tuition rate and start setting money aside in a prepaid account that can be pulled from later to pay for college tuition. The money directly transfers to public colleges and universities at the prepaid in-state tuition rate from the year you opened the plan. It doesn’t matter if the tuition rate goes up later, your rate is locked via the prepaid plan. You can purchase or prepay for up to 120 community college or university level credit hours as well as dormitory fees. It can also be used to pay for vocational or graduate school, as long as the child is getting that education within 10 years of their projected college enrollment date. Your money is guaranteed by the state, so you don’t risk losing it, and if the child opts not to go to college, what you paid in is 100% refundable or you can transfer it to another family member. Or, if they decide to go to an out of state college, the funds transfer with you and can be applied to that school’s rates. Not too bad. I don’t remember why I didn’t enroll later that year, but I did get into open enrollment the following year after my son turned 4. Several years later, a few university years were paid off. I’d considered purchasing a few more years but decided to talk to a financial planner about something else first. I’d started hearing about something called a 529 college savings plan.

The purpose of the 529 plan is essentially the same as the prepaid plan – setting money aside now to pay for college later. However, the 529 plan casts a bit wider net. Unlike the prepaid plan, there is no time limit for when the money needs to be used, and it can be used for all educational-related expenses, not just tuition or dorm fees. It can also be used to pay for meal plans, books, or computers. Additionally, it can be used to pay for tuition and fees at the K-12 level, not just college or vocational school expenses. This plan is not just a one in, one out as far as the money saved. A 529 plan is an investment plan, similar to a 401k if you want to think of it that way. It’s an investment plan specifically for educational expenses. Now, because it is an investment plan (because your money is in the stock market), there is a risk that you will lose money – just like with any other investment. If your child decides not to go to school, you can withdraw your money from the plan, but the earnings are subject to a 10% federal tax penalty if they aren’t used for educational expenses. The appeal of this plan for me was that we could use it to pay for more than just tuition and local fees and that there was a chance to make more money than I put in.

So, rather than put all my eggs into a prepaid plan, I opened a 529 plan as well.

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So, which is best? Whatever you are the most comfortable with. There is no one size fits all when it comes to finances. That’s why it’s so important to take in as much information as you can. It’s all guidance, not mandates. It’s up to you to make a decision from there. All in all, I’m happy with both of these college savings options. Also, anyone can contribute to either plan. It doesn’t have to be just a parent or legal guardian. Other family members and friends can contribute as well. I still plan to encourage my son to apply for scholarships and to work part-time while going to school if he can. There’s just some good life lessons that come with working, even if just a few hours a week, and going to school at the same time, in my opinion. We can also get creative. In the state of Florida, dual-enrolled students simultaneously enroll at a high school and Florida state college where all tuition and fees are waived. Textbooks are also free. I, myself, did not dual-enroll, but I did early enroll. Instead of going to high school in my senior year, I started my freshman year of college. Tuition and fees were waived, but I did have to pay for my textbooks. My mom and I started working at the college bookstore to get an employee discount, so at least we didn’t have to pay full price for my books while I earned my Associates degree. See? There are ways to get creative at getting those college costs as low as possible. If my son takes either of these routes, early enrolled or dual-enrolled, that’s at least one tuition free year we don’t have to worry about. Add potential scholarships, the prepaid plan, and the 529 plan to the mix, and he should be set for everything he needs to pay for his Bachelor’s degree – maybe even a portion of grad school too if he decides to go and the 529 plan does well.

Weigh the pros and cons for yourself, and see what makes the most sense for you and your family. It’s also going to depend on where you live. I believe Florida is one of only nine states that offer a prepaid college savings plan today. The 529 savings plan, on the other hand, should be available in every state. Check to see what the options are where you live. Take your time reviewing everything, then get started. My co-worker was only able to save for a period of one year before her daughter left for college, but the important thing is that she saved. Just start from where you are. Like with most things, just getting started is half the battle.