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See what's new in prepaid college plan

By HELEN HUNTLEY
Published October 15, 2006


The Florida Prepaid College Plan starts another open enrollment period Monday with some important new tax and financial aid advantages as selling points.

Not that it needs a lot of marketing. Since its inception in 1988, more than 1.1-million contracts have been bought on behalf of 791,670 students. By the end of last school year, 163,264 of them had used at least some of their benefits to help pay for college.

Here's what's new:

Congress recently granted permanent tax-free status to qualified withdrawals from Florida Prepaid and other 529 savings plans, a benefit that had been scheduled to expire in 2010. Removing the uncertainty is expected to spark more interest in the plans, which are available in various forms throughout the country.

Withdrawals from Florida Prepaid and from its companion Florida College Investment Plan will continue to be tax-free so long as the amounts don't exceed qualified expenses, which include tuition, fees, books, room and board.

Even better news for some Florida Prepaid participants is that Congress has changed the treatment of prepaid withdrawals under the federal financial aid formula. In the past, they reduced financial aid dollar for dollar. Now they are treated the same as any other parental savings, allowing students to qualify for more financial aid.

The chief attraction of Florida Prepaid is the ability to lock in future college costs.

"It's a sure investment; you know what the return is going to be," said Daniel Ewing of New Port Richey, who pays $78 a month on a four-year university tuition plan he bought for his 3-year-old daughter, Madelyn, shortly after she was born.

The plan has an annual signup period, which this year runs from Oct. 16 to Jan. 31. No surprise: the prices are higher than last year.

For a newborn, this year's lump sum payment for a tuition plan ranges from $3,511 for a two-year community college plan, an increase of 6 percent, to $11,717 for a four-year university plan, an increase of 6.5 percent. Monthly payment plans range from $24.53 to $81.87 a month and include an effective interest rate of 5.2 percent, up from 4.86 percent last year.

Plans also are available to cover local fees and one to five years of dormitory rental. Payments vary with the type of plan and the age of the child.

Victor and Brenda Bethune of St. Petersburg paid $105 a month for five years to buy a two-plus-two plan for their son Roderick, now 20. The plan is paying his tuition at St. Petersburg College and will cover two more years at a university.

"Some people think it's better to invest in some other investment vehicle, but for me it's worked out," Victor Bethune said.

"It's like a 401k. You put it in there and you don't touch it. Then when all's said and done, you know it's covered."

The prepaid plan can be used at public and private colleges throughout the country, but it won't pay more than the costs at Florida colleges. Although anyone can purchase a plan, the child or the child's parent must be a Florida resident.

The companion Florida College Investment Plan offers the same tax and financial aid benefits without the state guarantees.

Instead, parents, grandparents and friends contribute to the child's savings account, which then can be invested in mutual-fund-like options. It is open to residents of any state.

The investment plan now has 21,533 accounts with $104.6-million in assets, compared to Florida Prepaid's $6.7-billion. Nationally, savings plans are more widely available, some of them sold by brokers and mutual fund companies.

Information about both Florida plans is available on the Internet (www.florida529 plans.com) or by calling toll-free 1-800-552-4723.

I have a fixed insurance annuity. After my death, will my beneficiary be required to pay taxes on the interest accumulated over the years?

Yes. Beneficiaries must pay taxes on tax-deferred investments, including annuities, IRAs, retirement plans and savings bonds, when the money is withdrawn.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, write hhuntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731. Read more questions and answers at blogs.tampabay.com/money