College Pete

Is Florida Pre-Paid A Ponzi Scheme? And Even if it’s Not, Is it Worth It?!?

Is Florida Pre-Paid A Ponzi Scheme? And Even if it’s Not, Is it Worth It?!?

Last week’s Miami Herald ran a story about a new plan out of the State Senate Education Committee that would lower the cost of the widely-popular Florida Prepaid College Program.  While this proposal is far from becoming law, I’m thinking that the state’s new plan, which could potentially lead to $50 million in refunds for some already-enrolled families, might actually gain some traction this being an election year and all.

Which is, politics notwithstanding…  well, strange.  And financially perplexing, considering that just a few years back (in March of 2011, to be exact — a decidedly non-election year), then State Sen. Evelyn Lynn (R-Ormond Beach) was leading the charge to SUSPEND the FL Prepaid Program.  Why?  Because the plan was under severe financial strain, unable to sufficiently keep up with or meet the present day tuition costs (rising at a hefty clip, faster than inflation and far faster than what the plan is capable of returning).  The concern was that the Pre-paid Plan would become untenable on its own and would require more and more new enrollees to meet its existing enrollees’ tuition needs.  If you’re thinking that this all sounds like a giant ponzi scheme in the making (albeit a government sanctioned one), you wouldn’t be alone.

But I digress…  So, back to The FL Prepaid College Plan, which as most of you know, is alive and if not well… certainly doing a lot better.  How?  Well it’s not because college tuition has stopped increasing… though the Education Committee has also just proposed reducing the tuition differential (annual increase) from 15% to 6%. Nope – it’s because they raised the price of the FL Pre-Paid Plan.  By A lot.  In fact, a lot a lot.  A four-year Florida Pre-Paid University Plan (that will cover tuition and fees only – no dorm) for four years for your four year old child (Class of 2027) will cost you a whopping $51,000.  Ten years ago, that same plan cost me just over $8,000 for my then four year-old daughter (Class of 2017).  That is a 23% per year increase.  Obscene!

And frankly, not worth it anymore. Today, Florida Pre-Paid pays out about $6,000 for tuition and fees per year per student (or about $196 per credit).  For parents who invested $8,000 or so a decade ago, that’s a pretty nice return on that investment.  Like 3:1… now you know why the State’s lawmakers were sounding the Pre-Paid alarm in 2011.  But for parents who bought in more recently, at $50,000 plus, the return is going to be much, much less — Some might not even break even — especially if the tuition differential maxes out at 6% as has been proposed.

So now politically mindful lawmakers want to lower the price of the Plan to make it attractive to their constituents again.  Except haven’t we already learned that a bargain Pre-Paid Plan cannot cover its future tuition obligations from returns alone?  Can you say deja vous all over again? Something will have to give – here are a few possible scenarios:

1.  The FL Pre-paid plan will become insolvent and unable to meet its obligations to those enrolled
2. The FL Pre-paid plan will become increasingly reliant on future enrollees/investors to remain solvent (A Giant Ponzi Scheme)
3. FL Pre-Paid will raid other income sources, such as the State Lottery funded merit-based Bright Futures Scholarship, to meet its obligations
4. FL Pre-paid will alter (as in manipulate) the return formulas, so that the pay-out to students who will be using the plan to help fund tuition at an out-of-state university, would see a much smaller relative return than those who use the dollars at an in-state school.  This is already done to a certain extent, but the future effect could be even greater.

I’m a nice guy, fair, smart, detail-oriented, reasonable, measured, even open-minded… pretty much anyone who has met me will tell you that.  And I don’t say what I’m about to say lightly.  In my view, the FL Pre-paid College Plan is the most misunderstood, confusing and risky financial investment 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 investment.  And I mean it.

I don’t care what you’ve been told by your well-intended neighbor (especially one who’s already ‘been through this college thing’), your guidance counselor, accountant or your financial advisor,  FL Pre-paid is certainly not the only way (and is no longer even a good way) for you to afford college.

And that’s true even for parents like me who purchased it a decade ago.  You see for folks like us, the FL Pre-paid plan was and is sold to the public as a way to cover the entire cost of college.  The reality is quite different.  FL Prepaid tuition + fees plan covers about $6,000.00 per year, assuming a full course load.  But the total cost of attendance at UF next fall is about $22,000.  So you’re left with an additional expense of nearly $16,000 per year .  Bright Futures Scholar Award will cover about $3,500, leaving you with about $12,000 per year — for four (or five) years – see last week’s graduation rates article).

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 when ’shopping’ for schools.   There are schools that are generous with merit-based aid (yes, even for B students), need-based aid, both, 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, and Johns Hopkins offer both, 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.  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, unique attributes, geographic or gender leverage.

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

3.  Position your student to go to 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.

(OK, that’s 3 strategies.  I got carried away.)

I’ll be talking more about FL Pre-Paid, 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 March College Planning Classes.  I have a couple in the near future, one next week in Miami and another in Weston in two weeks.  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.

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