Kudos to the State Legislature! Last week Florida’s lawmakers righted a pretty big wrong by a) cutting the cost of the Florida Prepaid College Plan by a whopping 50% (from about $54,000 to $27,000) and b) agreeing to issue upwards of $50 million in refunds to families who grossly overpaid for the popular state 529 college savings plan.

Maybe they’ve been reading my blog, especially the Feb 27 article ‘Is Florida’s Prepaid Plan a Big Ponzi Scheme’?

I doubt it, but at least they agreed with me that in its recent form, the Florida plan, which is often thought of, and even marketed as, a great deal and a way to buy future tuition at today’s prices — simply wasn’t (a great deal, that is) for many families. And now with House Bill 851, the State is compelled to do something about it.

An estimated 50,000 plan-holders who purchased a Florida University Plan between 2011 and 2014, and/or a Tuition Differential Fee Plan between 2008 and 2014 would have been significantly under water and will receive reimbursements or payment reductions going forward. That’s great news indeed, but it doesn’t address some of the fundamental flaws in the structure, the funding and the marketing of the plan to consumers.

The plan assumes a 6% tuition increase per annum, which is the tuition increase cap under current law (UF and FSU are exempted). This, in turn, has allowed the State to reduce the cost of the plan — which is a popular move in an election year. No surprise that politically mindful lawmakers want to lower the price of the Plan to make it attractive to their constituents again. Except for this. We already learned that a bargain Prepaid Plan cannot cover its future tuition obligations from returns alone. It was just three years ago that a widely supported initiative to ‘suspend’ the under-funded Florida Pre-paid plan led by then State Senator Evelyn Lynn in 2011 was all the rave in Tallahassee. Can you say deja vous all over again?

Further, haven’t we already learned that our still financially-strained colleges may not be able to compete without the ability to competitively set their tuition rates? So, am I concerned about the plan’s viability and how it might impact admissions prospects, graduation rates and educational quality at our already financially-strained, resource-constrained state universities? I am. I worry that requirements to continually attract new participants (to adequately fund the Plan) will put pressure on legislators to continually re-set tuition rates (down)… forcing schools to further cut services/programs which will further degrade the states 4 and 6 year graduation rates. Or that our state universities will compensate for prepaid, subsidized tuition by coming up with ‘new’ and off-setting differential fees (see my article on tuition differentials), or perhaps Florida’s Public Universities will be forced to replace more, and more qualified, in-state applicants with full-price paying out of state (out of country) students, rendering them even more difficult for Florida students to get admitted to.

I’m also worried about how the plan has been (and likely will continue) to be sold to consumers — as a ‘safe’ and ‘great’ way to cover all of your college costs. Except it’s not (just ask the 50,000 families currently eligible for refunds – some of whom already have students in college). The Florida Prepaid Plan is subject to the political whims (and election cycles) of the same politicians who oversee the funding of the participating schools, which kind of muddies the water, doesn’t it? Since pricing for the plan is set by the same people who set tuition pricing, it’s pretty difficult for consumers to forecast its true future value, let alone determine whether or not it will be a good or bad deal. In my view, the FL Prepaid College Plan is the most misunderstood and confusing financial instrument sold to the masses today. Note that I didn’t say the most confusing, misunderstood and risky college plan – I said the most confusing, risky and misunderstood financial instrument. And I mean it. I get more questions about this plan than anything else, and I hear more misunderstandings as well. So to clarify:

1. The Florida Prepaid plan is a type of 529 educational savings plan (named for Section 529 of the Internal Revenue Code). It is a college savings program with tax benefits for most families.

2. A FL Prepaid plan is not restricted to FL public universities – you can use your plan out-of-state or at in-state private colleges. If your child attends an out-of-state school or a private in-state school, you will receive a payout equal to the average price per credit/fees at the eleven Florida public universities (currently between $116.64 — $198.28/credit, depending on the type of plan you had purchased) — about $4-6,000.00/year, depending on the plan you had purchased. And the plan CAN be transferred to another family member in the event that your child does not attend college.

3. Conversely — and this is important — your investment in a Florida Pre paid plan does NOT guarantee your child’s admission to a qualifying public university.

4. To beat this dead horse, your plan will not reduce your child’s chances at admission to a FL university

5. And it will NOT cover your child’s Total Cost of Attendance – which today is about $20 -22,000/year at a public university in Florida (even with the dorm plan, your Florida Pre-paid plan will cover about $10-12,000/year)

5. And finally, your investment in the Florida Prepaid plan Will NOT be exempted from the government and college’s calculation of your Expected Family Contribution, which is the key determinant of your student’s financial aid offer(s).

Remember – every family, every student and every situation is different. And without knowing yours, I wouldn’t be able to render an appropriate opinion as to which/whether a Florida Prepaid Plan is a good option for you. But, if you’re looking for a generalization (not to be misconstrued as personal advice) then I’d say this about the Florida Prepaid plan: if you already have it, keep it. If you’re looking at the plan for your newborn or elementary school/middle school child (lump sum $27,000), and will benefit from a tax perspective, consider it… but also consider other forced savings options that are exempt from financial aid formulas (529’s are penalized in the financial aid analysis; annuities and cash value life insurance policies are not). And, if you’ve got high school age children then you have a shorter window to realize a return and I’d probably look at alternatives to FL Prepaid.

Regardless of your situation, the FL Prepaid plan is but one piece of a rather complex college funding puzzle.

A better approach to making college affordable is to have an integrated college plan for your family, one that incorporates not only multiple financial planning tools, but also includes the right admissions approach for your student(s) when ’shopping’ for schools. There are schools that are generous with merit-based aid (yes, even for B students), need-based aid, both or none. There are schools that ‘look for’ gender balance, geographic balance or are in the market for some other ‘special’ type of student to round out their class.

What I mean is the Ivy League, Stanford, Northwestern, Tufts, Amherst, and Davidson — among others — only offer need-based aid. Wash U, Tulane, UM, Vanderbilt, Ithaca, Syracuse, American University and Johns Hopkins (for example) offer both need-based scholarships and merit/talent-based ones, but not in equal measure. Others, still, are simply not so generous and they’ll tell you that up front. These include many out of state public schools (hello Penn State, Indiana, etc.) and oddly enough NYU, where they acknowledge that they’re expensive, even after financial aid is awarded.

The key to economizing for college and meeting your student’s academic, social and career needs is to KNOW WHAT ALL OF YOUR FINANCIAL AND ADMISSIONS OPTIONS ARE AND HOW TO ACCESS THEM IN THE FIRST PLACE. Before your child applies! There are two concurrent strategies that should be at play here, starting when your child enters high school but not much later than 10th grade:

1. Position your student for merit aid by researching schools that award money in areas where your kid has strengths (above the school’s average for grades and scores), unique attributes, geographic or gender leverage.

2. Position your finances so that you can maximize Institutional Endowment, need-based financial aid. (Remember, FL Prepaid is NOT exempt from the financial aid formulas – it will count against your asset protection allowance).

3. Position your student for a school that tends to graduate their students in 4, not 6, years! With college, you may think you’re saving money by sending your child to the less expensive school. But if it takes 5+ years to graduate then it could end up costing more than a more expensive, private school.

I’ll be talking more about the FL Prepaid changes, what college costs today, why it might be less expensive to go to a ‘pricier’ school, all of the strategies I just mentioned and about ‘comprehensive’ planning for college during my upcoming College Planning Classes. I have a couple in the near future, one next week in Weston and another in Miami next month. They are both free to attend. I don’t sell anything, you cannot buy anything, and my promise is that I will teach you a ton. You can click here to get more info or to register.

Best,
Peter

P.S. Please feel free to forward my mini-rant and class information to a friend, relative, neighbor or colleague who has college-bound children. I promise that they’ll thank you for it. Well, I cannot promise that, but surely they will feel the gratitude even if they don’t express it.

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