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TechnoratiThe New York Times offers an unhappy updateon state-run plans that pledge to cover the cost of attending a state's public institutions of higher ed, irrespective of how much tuition may have increased between the time of the pre-payments and a student's actual enrollment.
In other words, prepaid plans imply (or in some cases explicitly offer) a guaranteed return. But parents who invest in these plans may face "sticker shock" nonetheless.
From the Times:
[I]n the last year, the stock market slump and rising college costs have combined to drive all but two of the nation's 18 [prepaid college savings plans] into the red....
Even with stock market gains since Marc
h, the losses have forced some programs, like Pennsylvania's and Washington's, to impose new and higher fees that could amount to thousands of dollars a year in additional costs to parents.
Others, like South Carolina's, have developed doomsday scenarios, capping how much a family would get if the program shut down completely. West Virginia had to pump $8 million into its prepaid program to help restore its financial health because its fund lost 25 percent of its value in the last year. And Alabama closed its program to new enrollees because the fund lost almost half of its assets - more than $300 million - in the stock market in the last year, and the state might have to put its own money in to keep it solvent....
"Every time there's a significant market downturn, there's two main ways states make up for the losses: close to new participants to cut off the losses...or raise fees, [said Mark Kantrowitz, the founder and publisher of FinAid.org, a financial aid Web site]. "And raising fees makes it less attractive to new participants."
About a third of the states in the union adopted prepaid-tuition plans in the 1990s when Congress allowed them to be tax-deferred under Section 529 of the Internal Revenue Code. (Technically, prepaid plans are a type of "529 plan," but in common parlance, the "529" designation generally is used when referring to "college savings plans," not prepaid plans.)
The Times notes that thus far about 1.6 million families have invested in prepaid plans.
"The reason they're popular is simply because the states bear the risk, not the individual," said Jackie Williams, who was executive director of the Ohio Tuition Trust Authority for 10 years, until June....
[But n]ot every state fully guarantees its prepaid funds. Only five states offer a "full faith and credit" of the state guarantee, and seven are required by law to consider helping the funds out if need be....
All of the funds but Florida's and Colorado's now have an actuarial deficit, meaning they do not have enough money to pay all of their future college tuition obligations
Even plans that have held mostly fixed-income investments, and thus avoided much of the market downturn, are having trouble keeping up. The Florida plan has stayed out of trouble until now because 90 percent of its assets are in fixed-income holdings.
But the Florida Legislature for the first time has allowed public universities to raise tuition by up to 15 percent a year for the next five years, which is much greater than the 6.5 percent average the fund has counted on in the last two decades.
"You can't keep up with 15 percent tuition inflation with fixed income," said Andrew A. Davis, executive director of the Illinois Student Assistance Commission, which oversees that state's prepaid fund.
Some states are considering following the new approach taken by Texas. That new plan, according to the Times, "shifts the burden of the guarantee from the state to the public university system." (Somehow, that seems akin to old analogy about moving money from the left pocket to the right pocket.)
If the [new Texas] fund runs short, the universities [now] agree to cover the difference between what is available and how much tuition is in the future.
"It's an interesting idea, but the money has to come from somewhere," Mr. Kantrowitz said.
Indeed.
For more on saving for college, see How to Maximize Your College Savings Program.
Joseph Slife is a contributing author and editor for SMI. He spent 15 years with Crown Financial Ministries, co-writing articles with Larry Burkett and serving as executive producer for broadcasting. In addition to his work with SMI, Joseph is an adjunct instructor in the Dept. of Communication at Emmanuel College in Georgia. Visit www.soundmindinvesting.com to learn more.
