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Prepaid College Savings Plans Failing

By CityTownInfo.com Staff
September 24, 2009

Various state college savings plans touted as "guaranteed" are now providing less than parents and students expected as a result of skyrocketing tuition and the economic downturn's effect on the market.

According to Blake Fonteney, spokesman for the Tennessee Treasury Department, which runs the state's prepaid college savings plan, states offered "too good of an investment" when they guaranteed to match tuition inflation. He explained to U.S. News & World Report that the price of tuition has risen faster than the rate of inflation and investment returns for the last few years. "The problem," he said," is that it is not sustainable without some changes. Everybody here realizes that."

The Texas Guaranteed Tuition Plan, for example, recently announced plans to reduce the payout it will provide to parents whose children choose not to attend a public college in Texas. Originally, the plan had promised that investors could lock in tuition at about what they paid when enrolling, and the state guaranteed full payment of tuition. Yet beginning November 1, investors who choose to cancel their plans will receive only what they invested minus an administrative fee--amounting to thousands of dollars less than they expected. Students who attend public colleges in Texas, however, will get the full value of their tuition.

"I think we're setting a bad precedent," said state Rep. Marc Veasey, who signed a letter addressed to Texas Comptroller Susan Combs calling on the board to "immediately reconsider its action" regarding slashing refunds to investors. "We need residents of the state to have full faith in what we're doing down in Austin, particularly in these tough economic times," he told the Fort Worth Star-Telegram.

But comptroller spokesman R.J. DeSilva said the board has no choice if it wishes to keep the fund solvent. "The reason behind the rule change has not changed," he said.

Pennsylvania's Guaranteed Savings Plan faces similar woes: U.S. News reports that it is hundreds of millions of dollars short of its obligations for the next 18 years. Recently, the state began imposing premiums as high as 8 percent to investors in an effort to make up the deficit, reports the Pittsburgh Post-Gazette.

The situation has even prompted state Sen. Jeffrey Piccola to propose legislation removing the word "guaranteed" from the college savings plan so as to clarify that the state government is not obligated to bail out the fund.

"There is absolutely no way the taxpayers of this Commonwealth can be responsible for any deficit this program may incur," he told the Post-Gazette.

That sentiment is likely to be echoed in other states facing similar problems with college savings plans. U.S. News reports that Alabama's Prepaid Affordable College Tuition (PACT), for example, has only enough money to meet its promises through 2014. And a recent study found that prepaid plans in Illinois, Maryland and Virginia are only "guaranteed" to request bailouts from their state legislatures if more money is needed--but lawmakers are under no obligation to comply.

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