Tracking the Recession: Tuition Programs in Danger

Prepaid tuition programs allow families to pay their child?s future tuition costs in advance at today?s prices. Many are in trouble because of the decline in the stock market and soaring tuition. A second program, which has also suffered losses, offers families a variety of tax-free investment funds for college savings.

(Updated 5:07 p.m. EDT, April 20,2009)

The future of a popular program in 19 states that allows parents to prepay college tuition at public schools is shaky because of recent stock market losses and a wave of tuition increases.

The Wall Street collapse shrank the value of many investment funds, out of which the prepaid tuition plans disburse tuition and fees. At the same time, states are raising tuition to help balance their budgets in response to declining tax revenue caused by the recession.

"Just about all these programs are going through similar turmoil," said Joseph Hurley, founder of , a Web site devoted to financing a college education. "It's the same dynamic: investments are not keeping up with tuition increases. The irony is, it makes demand for these programs even stronger for families but that popularity translates into more financial stress for these programs."

The Obama administration has made college affordability a priority, through its Middle Class Task Force . Vice President Joe Biden went to St. Louis on Friday (April 17) to draw attention to the problem. "The challenges of paying for college in America is well understood," he said. "The growth of college tuition is far outpacing that of family income. No matter what else we do to get our economy moving, it all leads back to education."

Prepaid tuition plans vary, but most are set up so parents or grandparents pay today's prices for tuition and fees instead of the higher costs in the year their child goes to a state school. Those discounted costs are paid  as a lump sum or over time through monthly payments that are deposited into a state-managed investment fund. When the child is ready to attend a state college, the tuition and fees are paid from the fund.

Since 1971, the combined cost of tuition, fees and room and board has gone up 224 percent for students attending four-year public colleges and 156 percent for those at private schools. Over the same period, the consumer price index has climbed 432 percent, though it has increased at a much more consistent rate while college costs have been prone to larger spikes and declines in price.

The 19 states that have offered prepaid tuition plans, according to , a student financial aid website, are: Alabama, Colorado, Florida, Illinois, Kentucky, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Mexico, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia, Washington and Wisconsin.

None of the states has failed to pay tuition for plan participants in the current school year, but a few states are moving to bail out their programs.

Alabama's prepaid tuition fund has less than half of the money it needs to pay future tuition commitments and has suspended new enrollment as lawmakers try to save the program.  West Virginia lawmakers are considering pumping $8 million into the prepaid tuition program to cover investment losses. The program is closed to new enrollees but still has 7,200 participants.

The instability of the programs comes as some states are reporting record participation by parents seeking a hedge against future tuition increases.

 Pennsylvania Treasurer Rob McCord, who has ordered a review of the state's prepaid tuition plan after its assets dropped more than 23 percent, says enrollment in the program rose 26 percent last year.   Oregon lawmakers and Ohio education officials, reacting to the demand, are weighing creating new prepaid tuition programs but tying them less to the ups and downs of the stock market.

Another college savings program, available in 33 states, is not linked to future tuition costs. Under these plans, which like the prepaid programs are called 529 plans after the section of the federal tax code that created them, are simple savings plans that allow parents their choice of a variety of tax-advantaged stock and bond funds. Parents draw from their account when the student goes off to school.

Those savings plans also have been hit by the Wall Street meltdown.  Between Sept. 30 and Feb. 28, the average loss was 21 percent for the 529 plan portfolios in Morningstar's database, an investment research firm.

The tension over these  losses reached a point in Oregon where on April 13, state Treasurer Ben Westlund and Attorney General John Kroger filed a lawsuit against OppenheimerFunds alleging Oregon parents lost at least $36.2 million in account value because of Oppenheimer's alleged negligence for investing in a hedge fund.

Attorneys general in Illinois, Maine, Texas and New Mexico have launched separate investigations into Oppenheimer, which has denied wrongdoing and has said it disclosed details about the fund's performance to Oregon officials throughout the financial crisis.

In St. Louis, Biden said he would ask the treasury and education officials to study ways of making 529 accounts "more effective and reliable. Their analysis will examine how people save in the 529s, whether they are taking appropriate approaches to risk, and try to identify options and best practices for helping these funds be there for families when they need them."

In most of the 18 states with the prepaid tuition programs, officials say, the plans have enough money to cover their tuition obligations - for now. But in some states, the market losses were so severe that officials may have to consider dipping into state general funds, freezing enrollment or raising fees. Only Florida, Maryland, Massachusetts, Mississippi, Texas, Virginia and Washington guarantee that the state will bail out the tuition program if there isn't enough money.

Neighbors Florida and Alabama illustrate the challenges facing the programs. In Alabama, as in most states with the programs, the idea is that the state will manage the investments so earnings will grow faster than future tuition costs. That usually works well over time, but the severity of the 2008 Wall Street collapse hurt some state plans more than others. At the same time the funds' value is dwindling, the cost of tuition is rising.

Just two years ago, Alabama's prepaid plan had almost $900 million in assets, which would cover nearly all of its future tuition obligations to families. By Feb. 28, the assets fell to $431 million, less than half of what would be needed to pay future obligations to its  48,000 participants.

State Treasurer Kay Ivey has reassured anxious parents that the state can pay summer school tuition, but the fall semester is more uncertain. Lawmakers and Ivey are working on several ideas to prop up the plan, including limiting tuition increases and raising up to $30 million a year from other state funds.

With an open governor's race next year - incumbent Bob Riley (R) is term-limited - several announced and probable candidates are trying to capitalize on the trouble in the prepaid tuition program to win votes. Typical is U.S. Rep. Artur Davis, a Democratic candidate for governor, who said the losses in the tuition program are "an example of our state government's failing to manage our citizens' money wisely."  Ivey, a Republican who also may run, accuses her critics of "petty politics."

Florida has a different problem. Its $9 billion tuition fund is relatively healthy because it is financed through bonds instead of stocks. But the state budget has a $6 billion gap that will require deep cuts to Florida's 11 colleges and universities. To improve its state college and university system, many of Florida's business, political and education leaders have been pushing increases of up to 15 percent in tuition, which is second lowest in the country.

If that happens, monthly payments in the prepaid college tuition program could swell to $265 a month or more a child, up from $170 now. "The program will end," predicted Stanley Tate, founder of Florida's prepaid tuition program and a Miami real estate developer .

Tate has been fighting an often lonely battle against the tuition increases, waged with $500,000 for newspaper advertisements and a web campaign. Lawmakers and others who support the tuition increases say Tate is concerned only about holding college costs down. The issue is quality, they say. "Florida has the worst student-faculty ratios in the country," says Rep. Will Weatherford (R).

Prepaid tuition programs have been threatened before. Ohio suspended its program in 2003 as tuition was increasing. Pennsylvania imposed a temporary surcharge on its payment plan in 2003 because of a decline in the value of its investments. Texas, Colorado and West Virginia also suspended enrollment in its initial prepaid tuition programs.

But this time, there is more discussion in some states of whether the prepaid programs should be scrapped or retooled to avoid the fluctuations in the stock market. "I hope they do survive and find a model that works to keep them going because they do serve a great need," Hurley said.


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