Mid-March and Early April are always hectic at home. Schools are closed for spring break, and kids forget about math, science, history, and all the rest. They focus on vacation, beach time, or hanging out with friends. The last thing on their minds is school or what homework might be waiting for them on the other side of their time off.
While some High School Seniors may be thinking about college or what they’ll do after graduation, most likely, it’s not their top priority.
I have two of these “anything but school” minded children running around, a 13-year-old daughter preparing to start High School next year and an 11-year-old son entering 6th grade. They are both great kids, get their work done, have great friends, and stay active. But as soon as Spring Break rolled around a few weeks ago, any thought about school went right out the window, for them at least.
I spent some time during Spring Break thinking about college and what it will cost to put them through four years of higher education. My unfortunate thought experiment was triggered by my 8th-grade daughter telling me she plans to attend Columbia University. All week, my dreams were consumed by images of dollar bills flying out of my bank account!
Luckily, when my children were born, I opened 529 College Savings accounts. We’ll discuss those a little bit later. First, let’s look at some sobering statistics.
For the 2023-24 Academic Year, the cost of a four-year college education at a public university in Florida is estimated to be $23,150 for in-state students.
This includes tuition & fees ($6,380), books and course materials ($1450), transportation ($1,570), living expenses ($11,500), and miscellaneous personal expenses ($2,194).
For a student attending a public four-year university as an out-of-state student, the cost increases to $45,428!
The increase results from tuition & fees more than tripling to $28,658! All other costs associated with college would remain the same.
If your child chooses to attend a private college or university in Florida, the cost is estimated at $35,732 for 2023-24.
Tuition and fees are estimated at $18,800. Books & supplies are estimated at $1,366; living expenses are about $11,769 (on-campus) and $11,857 (off-campus).
If you have to pay for four years of college, your out-of-pocket cost will be between $92,600 and $181,712! And that doesn’t even factor in annual increases in college expenses, which have averaged about 8% annually since 2000.
So, What Can We Do to offset the expense?
Luckily, in Florida, we have options.
The Florida Bright Futures Scholarship Program
Everyone should first know about the Florida Bright Futures Scholarship Program.
The Bright Futures program offers two levels of college scholarships to Florida residents.
- Florida Academic Scholars, which covers 100% of tuition and fees for students who attend a public Florida University and meet specific eligibility criteria, which include, among many others:
- 16 High School credits in specific areas of study (4 English, 4 Math, 3 Natural Science, 3 Social Science, and 2 World Language).
- A minimum GPA of 3.50.
- Minimum ACT score of 29 or SAT of 1330 (for 2022-23 Graduates).
- 100 hours of either volunteer work or paid work.
- Florida Merit Scholars, which will cover 75% of tuition and fees for students who attend a public Florida University and meet specific eligibility criteria, which include, among many others:
- 16 High School credits in specific areas of study (4 English, 4 Math, 3 Natural Science, 3 Social Science, and 2 World Language).
- A minimum GPA of 3.00.
- Minimum ACT score of 25 or SAT of 1210 (for 2022-23 Graduates).
- 75 hours of volunteer work or 100 hours of paid work.
Successful completion of International Baccalaureate (IB) or Advanced International Certificate of Education (AICE) programs, which are offered by several High School in the state, including Riverview High (IB) and Sarasota High School (AICE), waive the ACT/SAT score requirements to qualify for the Bright Futures Scholarships. However, ACT and SAT scores may still be required for college admission.
For more information on the Bright Futures program, you can visit this website:
https://www.floridastudentfinancialaidsg.org/SAPBFMAIN/SAPBFMAIN
Prepaid Tuition Programs
Some states, Florida included, offer state-run prepaid tuition programs.
These plans allow parents to “lock in” future education costs at today’s price. Considering that the average annual increase in college costs has been 5% or more, this can offer meaningful savings over time.
While the plans are designed to cover in-state tuition costs, they can also be used to pay for out-of-state expenses. However, the benefit is limited to the value of the plan at the time of purchase.
Prepaid plans typically offer flexibility regarding what type of education you want to pay for; 2-year college, 4-year college, “2+2”, and 4-year University plans are all available in Florida—additionally, there is flexibility in how you pay for them. You can pay monthly until the child graduates high school, over five years, or in one lump sum.
These plans can be a great option, especially in combination with a 529 college savings plan.
You can learn more about Florida Prepaid here:
https://www.myfloridaprepaid.com/
529 College Savings Plans
A self-funded option available to everyone is known as the 529 College Savings Plan. Created in the 1980s and named for the IRS code that fully authorized the plans in the late 1990s, these tax-advantaged savings accounts offer a way for any family member, not just parents, to invest money to help pay for future education expenses. Any family member or friend can own the plan, and anyone can contribute. The impact on available aid via the FAFSA can be dramatically different depending on who owns the plan, so make sure you work with a qualified professional to determine the most beneficial ownership.
Every plan has different lifetime contribution limits, ranging from $235,000 to $550,000, shopping around to find the best fit can be beneficial.
There are no annual contribution limits, but remember that individual contributions above the annual gift tax limit ($17,000 in 2023) may count against your lifetime estate and gift tax exclusion. A married couple can combine their annual gift exclusion to contribute $34,000 this year, and it is possible to “accelerate gifting” for five years to make a total contribution of $170,000. Any contributions made to the same plan or beneficiary in the following 5 years may be considered taxable gifts. Always consult your tax professional.
The true advantage of a 529 plan is its flexibility. Money invested to cover future education expenses grows tax deferred. If the funds and future growth are used to pay for a “qualified education expense,” there is no tax paid on the capital gains.
Initially, 529 plans were intended as college savings plans. However, tax law changes in 2017, 2019, and 2020 added several new options to 529s. They can now be used to pay up to $10,000 per year of K-12 education, vocational school expenses, and even $10,000 of total student loan debt.
Additionally, the SECURE Act 2.0, passed in December of 2022, allowed unused 529 funds up to $35,000 to be rolled to a ROTH IRA for the benefit of the student. Some important limitations apply: The 529 account must have been opened for at least 15 years, and funds rolled from the 529 to a ROTH IRA must have been in the plan for at least five years to be eligible for the tax-free rollover. Additionally, the rollovers are subject to annual contribution limits of $6,500 under age 50 and $7,500 for ages 50 and over.
529 Plans are offered nationally, and depending on the state where you reside, they may offer immediate tax benefits, including income tax deductions. There is no state income tax in Florida, so no deduction is available, but several other states offer such incentives to save for college using a 529 if you reside out of state. Always consult your tax professional if you have questions about potential benefits.
Other Options
There are other savings and investment options you can use to help pay for college, but not all offer the same features or benefits.
U.S. Savings Bonds, if Series EE bonds issued in 1990 or later, and all Series I bonds can have their interest excluded from income tax if proceeds are used to pay for college or rolled into a 529 plan.
The savings bond owner must have reached the age of 24 before the bond issue date. The issue date is the first day of the month the savings bond was purchased.
Additionally, savings bonds purchased to pay for a child’s education must be registered in the parent’s name, not the child’s. However, the child can be listed as a beneficiary on the savings bond but cannot be a co-owner. Being listed as a beneficiary is not required.
It is possible to request that a savings bond be reissued when listed in a child’s name if the parent provided the funds for the initial purchase.
To reissue paper savings bonds, file form PD F 4000 E. If the savings bonds were purchased through TreasuryDirect.gov and are not in a minor-linked account, the parents can log in and correct the savings bond registration directly. If the savings bonds were purchased through TreasuryDirect.gov using a minor-linked account, log in to the account and file form PD F 5446.
The savings bonds must be redeemed to pay for qualified higher education expenses at an eligible institution or rolled over into a 529 plan, prepaid tuition plan, or a Coverdell education savings account. These rollovers must occur within 60 days of redemption.
Uniform Gift to Minor Accounts (UGMA) and Uniform Transfer to Minor Accounts (UTMA), could also be used to save for college expenses. However, they don’t offer tax deferral of capital gains or dividends and interest. Additionally, because they become assets of the child upon the age of majority (21 in Florida), they may impact the availability of other need-based aid programs. And, once the account becomes the student’s asset, it can be accessed and used for anything. These accounts are not restricted to education expenses.
Coverdell Education Savings Accounts can also help save for future education expenses. While they operate similarly to 529 plans, they have some significant differences.
Coverdell accounts offer tax-free growth and tax-free withdrawals when used for qualified education expenses.
However, important limitations apply:
- The maximum contribution limit per child is $2000.
- Once the child reaches the age of 18, no more contributions can be made.
- If a family’s Modified Adjusted Gross Income (MAGI) exceeds $95,000 (single filers) or $190,000 (joint filers) the maximum contribution is phased out, meaning the maximum amount that can be contributed is reduced as income rises. No such limitations apply to 529 plans.
So, now what?
The cost of education, especially college, is higher than ever and seems to increase yearly. Fortunately, parents and family members have several options.
Between state-run scholarship programs like Bright Futures, prepaid tuition plans, 529 college savings accounts, and other available options, it is possible to offset all or a portion of these costs. Sorting through the available options and the potential benefits and drawbacks can be daunting.
Sitting down with a qualified professional who can help project the potential future expenses, and weigh the options available to you, is an exercise worth your time.
If you, or someone you know, is concerned about future education expenses, call our office or email us at hello@gulfsidewealth.com.
Any team member is willing and able to assist you in making an informed decision.
Important Information
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
Investing is subject to risks, including loss of principal invested.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please note that individual situations can vary, and therefore, this information should only be relied upon when coordinated with individual professional advice.