Prepaid college tuition plans traditionally provide families with a low-risk way to pay for a child's higher education. But recently, costs associated with this type of plan have significantly increased to keep pace with the tumultuous economy, and companies are reneging on their pledges to provide families with a fixed tuition rate. Families already feeling the pains of the downturn are bearing the burden of thousands of dollars in unanticipated costs.
Prepaid college tuition plans fall under the umbrella of 529 plans, which include both tuition and college savings plans. These types of plans, named after the 529 tax code, provide families with options to save for their children's education in advance.
Prepaid college tuition plans allow families to purchase academic credit hours or pay the current rate for a year's tuition at their state university with the guarantee that their investment will be worth a year of tuition or a specific number of credit hours years down the road, regardless of increases in tuition costs and fluctuations in the stock market, according to Mark Kantrowitz, publisher of the Web sites FinAid.org and FastWeb.org.
Plans of this sort serve as an attractive option for families hoping to avoid dramatic increases in tuition costs because they transfer the risk of the investment away from the family and onto the company that administers the plan or onto the state.
In practice, however, these investments are not entirely risk-free, particularly in a troubled economic environment.
During an economic downturn, states' higher education budgets usually shrink, causing colleges to compensate for lost funding by increasing tuition. As the values of assets invested in the stock market decrease, prepaid tuition plans are forced to raise premiums or increase their unit costs.
Several states' plans, including those of Colorado, Alabama and Texas, have suffered significant financial losses and have had to either shut down or raise prices for their programs, according to Betty Lockner, director of Guaranteed Education Tuition, the state of Washington's prepaid tuition program.
"[Prepaid college tuition plans] tend to work out quite well when the economy is booming, but when the stock market is going down they tend to be under a lot more financial stress," Kantrowitz told the Daily.
"The most recent economic downturn caught a lot of people by surprise," Kantrowitz added. "People are discovering that the guarantees in these plans aren't as solid as they thought."
The prepaid college tuition plan in Washington has had to significantly raise its prices. "We raised [the price] the most we have ever raised it last year," Lockner told the Daily. "It was 76 dollars a unit, and now it's 101 dollars a unit."
Still, the program continues to enjoy high enrollment. Its resilience, Locker said, comes from the support of the Washington state legislature. "The model that the program uses is designed to be sustainable," Lockner said. "We have built a model [in which] if the tuition goes up, our price goes up."
In Texas, the prepaid college tuition plan suffered irreconcilable losses, and the program closed to new participants in 2003. The state began a new program in the past year based on a different financial model in which universities bear the burden of economic drops.
The state of Texas recently used its authority to retroactively change the terms of its contract for the new program, called the Texas Guaranteed Tuition Plan. As of this November, families who choose to cancel their prepaid college tuition plans will receive only their initial investment and none of the subsequent interest the investment earned to match the current cost of college tuition.
"If the stock market goes down, your 529 plan goes down," Kantrowitz said. "In prepaid plans you think you are transferring the risk of the downturn to the state, but the reality is that the state will probably renege on part of its promise."
Florida's prepaid college tuition program remains popular due to its state guarantee. In the case of a stock market or investment slump, Florida state will cover all costs that the program owes its beneficiaries, making the investment relatively low-risk.
"In current times of economic uncertainty and rising prices, the peace of mind for a family with a Florida Prepaid College Plan is more valuable than ever," Susan James, director of external affairs for Florida Prepaid College Board, said in a statement. "Your Florida Prepaid College Plan is financially guaranteed by the State of Florida."
The program in Florida is unique in that 91 percent of its trust fund is invested in fixed income securities, making it virtually immune to the stock market's oscillations, according to James' office.
