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Prepaid College Plans: Are States Breaking Their Promise?

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It seems the more I read and the more news I listen to, I feel increasingly defeated in my heart with regard to the many failures (and counting) recently revealed of the American financial system especially in areas relating to college tuition. This week, a disturbing article in the Wall Street Journal described broken promises, monies lost, and the imminent shortfall of prepaid college plans to further chafe the hard-working American citizen.

“Across the nation, college prepaid plans are operating in the red, putting promises to investors…in jeopardy.” (WSJ, Kim)

The original intent of college prepaid plans was to function as a type of 529 plan allowing investors to make initial payments, swapping out future tuition contracts or credits. Families of young children would be able to pay the entirety of the college tuition bill or fractions of the bill over a period of time without being affected by the potential of rising tuition costs. The program promised any amounts remaining at the time of the child’s entry into college due to the increase of tuition would be covered.

Unfortunately, in the face of deficit, investors are seeing a change in the hearts of the states where prepaid plans are offered. State governments are beginning to withdraw from the guarantee of full payouts according to the prepaid plans and instead, vying to payout on contributions based only on the current tuition averages, putting pressure on families to make up the remainder.

“’There’s an aura of guarantee around many of these programs,’ said Tim Ranzetta of Student Lending Analytics. ‘But when you dig into it, it’s often a lot less than you’d expect.’” (WSJ, Kim)

The danger comes from a rapid decline in state funding awarded to higher education and thus gives colleges the power to raise tuition rates beyond what is legislated. Prepaid plans are not substantial enough to support this disparity, and analysts expect many of these state plans to run dry within the next 5-7 years.

Families who have invested in prepaid college plans are urged to read the fine print. The article warned that many of these state contracts have given themselves room to come short on their promised contribution amounts. States have, however, attempted to ease the sting by enacting some levels of guarantees:

Full Faith and Credit
States commit to cover deficits if their respective program cannot fulfill its obligations.
Florida, Mississippi, Ohio, Texas, and Washington

Legislative Appropriation
State legislatures evaluate possible appropriations to meet losses.
Illinois, Maryland, South Carolina, and Virginia

Fund Assets
Program money is subsidized by the assets in the plan.
Alabama, Colorado, Michigan, Nevada, and Pennsylvania

According to the Wall Street article, some of the other programs require schools to compensate for the negative amounts or use other reserves: Independent 529 Plan, Kentucky, Massachusetts, Texas Tuition Promise Fund, and West Virginia. Additionally, many of the current plans are no longer available to new investors: Alabama, Kentucky, Ohio, South Carolina, Texas, and West Virigina.

The burden falls directly on hard-working citizens who invested faith and money in what they thought was a sturdy system. These families now face a tough road ahead with rising tuition costs and devastatingly steep student loans.

Source: Wall Street Journal

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