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New way to pay for college on horizon

Florida prepares to roll out a savings program that will compete with both mutual funds and prepaid tuition plans.

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published March 8, 2002


The state of Florida is preparing to roll out a new college savings program that will compete with brokerage firm and mutual fund offerings as well as the state's own popular prepaid tuition program.

Three years in the making, it could be available as soon as next month.

TIAA-CREF, which already manages a dozen state college savings plans, has been selected to administer the program. The New York company is a well-known provider of retirement plans for educators and also sells low-cost mutual funds and annuities to the public.

The new program is a 529 college savings plan, named after a provision in the tax law that offers college savers numerous advantages. Savings in such plans grow tax-deferred and can be withdrawn tax-free if they are used to pay college expenses. Compared to most savings alternatives, the minimum contribution is smaller and the maximum much larger -- as much as $240,000 in some plans. Special features allow grandparents to use the plans to remove money from their estates without giving up total control.

Details have not been released, but the new Florida plan will offer a menu of investment options similar to mutual funds. Accounts will grow or shrink with the performance of the stocks, bonds and other investments each fund owns, with no guarantees. Savers will have to accept the risk of loss in return for the possibility of higher returns.

The savings plan will be offered alongside the existing Florida Prepaid College Program, and participants will be able to enroll in either or both. However, there will be no provision for existing prepaid participants to switch the value of their contracts to the new plan. Those who want to switch will have to cash out, with no interest earnings.

The prepaid program has sold 732,000 contracts, making it by far the most popular college savings program in the nation. It offers guaranteed tuition payments -- essentially allowing the purchase of tomorrow's tuition at today's prices. Contracts are available for state universities or community colleges and for fees and dormitory rooms as well as tuition.

But the prepaid program covers only a portion of college expenses and contains numerous restrictions. For students who want to attend out-of-state or private colleges, a prepaid plan is just a drop in the bucket. Only Florida students can enroll and if the contract is used out of state, it pays no more than 5 percent interest. The new savings plan most likely will be available without residency restrictions or disadvantages in using the plan for out-of-state colleges.

The Legislature authorized the savings plan three years ago, and state officials say it has taken them this long to work out the details. In the interim, most of the large mutual fund companies and brokerage firms have formed partnerships with various states and begun promoting those states' plans to their clients. Florida residents already can sign up for any of those plans that permit out-of-state participants.

Colleen Englert, spokeswoman for both the prepaid program and the new savings plan, said confusion has resulted from incorrect information being distributed by those marketing other plans. "A lot of states have been really quick to get out there, and they're paying for it now," she said. "We're taking a lot of time to make sure that we do it right."

Although the state is not releasing information about its plan yet, there is plenty of information about 529 plans available on the Internet. Those who are interested can learn more at www.savingforcollege.com and on the TIAA-CREF Web site.

-- Helen Huntley can be reached at huntley@sptimes.com or (727) 893-8230.

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