By Ted Hoepner, Chairman, Florida Prepaid College Board
Tallahassee, Fla. – It’s no secret that the cost of higher education rises each year, and that saving for college is one of the most important steps a parent can take to ensure their child’s future. However, before selecting a savings strategy, it is critical that parents have a clear understanding of what their investment is, what it covers and how it operates. The Florida College Investment Plan offers families an easy and affordable way to save for future college expenses. As Chairman of the Florida Prepaid College Board, I will answer commonly asked questions about the plan.
Q. What is the Florida College Investment Plan?
A. The Florida College Investment Plan is a 529 plan sponsored by the State of Florida and managed by the Florida Prepaid College Board.
The term "529 plan" describes a type of tax-advantaged college savings plan authorized by Section 529 of the Internal Revenue Code. The money you contribute to these plans grows tax-deferred, and when the beneficiary (student) is ready for college, withdrawals for qualified college expenses are exempt from federal income tax. There are two types of 529 plans: prepaid plans and savings/investment plans.
Q. Who can participate in the College Investment Plan?
A. Anyone can participate in the College Investment Plan – parents, grandparents, other relatives, friends and even businesses – can open an account. The account owner and beneficiary do not have to be residents of Florida to participate in the plan; however, they must be citizens or resident aliens of the United States and have a valid social security number. The beneficiary can be of any age – a child, an adult or even yourself. You cannot, however, open an account for an "unborn" child, and the account owner must be at least 18 years old.
Q. I already have a Florida Prepaid College Plan. Why would I want to sign up for the College Investment Plan?
A. If you have a Florida Prepaid College Plan, you have already locked in the future cost of college tuition. While the Prepaid College Plan is a great start, college tuition represents only a portion of the total cost of college. Designed to complement the Prepaid College Plan, the College Investment Plan may be used to pay for other fees, including books, food, off-campus housing, supplies, computers and other educational-related expenses not covered by the Prepaid College Plan.
You don't have to choose between the Prepaid College Plan and the College Investment Plan. You can sign up for both plans, and you may use the plans separately or together.
Q. Where can the student use the plan?
A. The College Investment Plan may be used at any public or private accredited university, community college or technical school, anywhere in the country, and even at some schools abroad.
Q. How are my contributions in the College Investment Plan invested?
A. The College Investment Plan offers five investment options. You may select one or any combination of investment options that best fit your financial goals.
Fixed Income Investment Option
The Fixed Income Investment Option is invested primarily in U.S. Treasury and U.S. Government bonds, corporate bonds, and mortgage-backed and asset-backed securities. The objective of the Fixed Income Investment Option is to provide a moderate risk alternative for your college investment.
U.S. Equity Investment Option
The U.S. Equity Investment Option allocates your contributions equally among a domestic large capitalization growth portfolio, a domestic large capitalization value portfolio and an S&P 500 Index portfolio. The objective of the U.S. Equity Investment Option is to provide an opportunity for growth or capital over a long investment horizon. Given the higher volatility of this option, the risk of loss is greater.
Balanced Investment Option
The Balanced Investment Option allocates your contributions equally between the U.S. Equity Investment Option and the Fixed Income Investment Option. The objective of the Balanced Investment Option is to generate long-term growth, but with less short-term volatility than the U.S. Equity Investment Option alone. The portfolio will be rebalanced periodically to maintain a 50 percent allocation to the U.S. Equity Investment Option and a 50 percent allocation to the Fixed Income Investment Option.
Age Based/Years to Enrollment Investment Option
The Age Based/Years to Enrollment Investment Option allocates your contributions between the Fixed Income Investment Option and the U.S. Equity Investment Option based on the beneficiary's age or number of years to college enrollment. The younger the student, the higher the percentage invested in equities. As the student approaches college enrollment, the percentage invested in equities decreases and the percentage invested in fixed income increases.
Money Market Fund Investment Option
The Money Market Fund Investment Option allocates your contributions into a portfolio consisting of short-term fixed income securities, including cash and money market securities. The Money Market Fund Investment Option seeks to preserve your principle investment, obtain high liquidity and achieve current income through investments in short-term securities.
Q. Who manages the investments?
A. The Florida Prepaid College Board contracts with top professional money managers to manage the plan’s investments. Investment partners include: Deutsche Asset Management, Northern Trust Investments, StableRiver Capital Management, and Columbia Management.
Q. Will I pay commissions, sales charges or management fees?
A. You will pay no commissions or sales charges when you enroll in the College Investment Plan; however, there is a one-time application fee of $50.00 (or $30.00 if you already have a Prepaid College Plan) and a low annual administration fee to cover the cost of investment and administrative services. The administration fee is just ¾ of 1 percent (75 basis points) of your account balance, meaning that for every $1,000 in your account, you will pay only $7.50 a year.
Q. Is there a minimum contribution amount?
A. Yes. Families may enroll in the College Investment Plan at any time of year for as little as $25 per month through automatic withdrawals from a checking or savings account, or a lump-sum payment of $250. After the initial contribution of $250, families decide how much and how often to contribute to their account.
Q. Will I have to pay taxes on withdrawals from my account?
A. Currently, withdrawals for qualified higher education expenses are exempt from federal income tax. Earnings on qualified withdrawals are exempt from State of Florida taxes, such as intangible taxes. However, if you make a withdrawal for something other than a qualified college expense, the account owner will be required to pay federal income tax and an additional 10 percent federal tax on the earnings, if any. There are certain exceptions: death or disability of the beneficiary, or if the beneficiary receives a scholarship.
Q. What if the student receives a scholarship?
A. If the student receives a scholarship, the College Investment Plan may be used to pay for any qualified college expense that is not covered by the scholarship. You can also transfer the account to another qualified beneficiary, or you can request a withdrawal for the amount of the scholarship without incurring the additional 10 percent federal tax; however, the earnings portion of the scholarship refund is subject to federal income tax. A scholarship-refund withdrawal cannot exceed the allowances under section 25A(g)(2) of the IRS code. The plan does not charge any fees for a withdrawal due to a scholarship award.
There has never been a better time to start a college savings plan. With the Florida College Investment Plan, you can make a child’s dream of higher education a reality. For enrollment information, call 1-800-552-GRAD (4723) or visit www.MyFloridaPrepaid.com.