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Changes In Texas Prepaid Tuition Plan Causes Concern

By CityTownInfo.com Staff
October 19, 2009

Significant changes to the Texas Guaranteed Tuition Plan will be taking place on November 30, and concerned parents are debating whether to cancel their contracts.

The Dallas Morning News reports that the original plan allowed families to prepay costs for Texas public and private colleges and universities years in advance, locking in rates which were guaranteed to cover the cost of higher education in the future. Under the plan, even if children decided against attending college, families could receive a refund of everything they paid along with the investment return.

But skyrocketing tuition along with lower-than-expected investment returns forced the plan to change the rules. After the state Legislature deregulated tuition, the plan closed to new enrollments in 2003. Now the plan has announced that while the plan will cover tuition for Texas public universities, participants who cancel their contracts after November 30 will only receive back their original investment minus administrative fees.

"I think it's a pretty rotten move on the state's part to have done that," said Bill Singleton, who bought a prepaid contract for his son, age 11. "We bought into the program and paid in full based on their pledge that if plans would change, we wouldn't take a loss, that we would get a return on that investment equal to the current value of it."

Financial experts noted that those who plan to use the funds for their children to attend public universities in Texas need not worry about the change. But some may very well be watching the developments in Texas closely to see if other states, also dealing with failing prepaid college plans, will take similar steps.

"I think ultimately more and more of these plans are going to close down to new investments," predicted Mark Kantrowitz, publisher of FinAid.org, who was quoted in The New York Times. "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. And raising fees makes it less attractive to new participants."

Joe Hurley, founder of Savingforcollege.com, noted that the change in Texas is particularly troubling. "In short," he told the Dallas Morning News, "the rug is being pulled out from under many of the plan's 100,000-plus current participants. This is the first time I can recall that a 529 plan has gone back on its promises in a big way."

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