Legislators Seeking Solutions For Prepaid Tuition Plans

Compiled By Yaffa Klugerman
December 11, 2009

Several states are proposing changes to remedy beleaguered prepaid tuition plans facing significant shortfalls.

In Alabama, State Treasurer Kay Ivey last week announced a plan to save the state's Prepaid Affordable College Tuition plan, reports The Birmingham News. The plan currently only has enough funds to fulfill its obligations through 2014. Ivey's proposal will divide the current assets in the PACT trust fund among Alabama universities in exchange for guaranteed paid tuition for PACT participants. According to the Associated Press, PACT would also stop paying for out-of-state universities after May 31, 2015.

Ivey acknowledged that Alabama colleges and universities had yet to agree to her proposal. She emphasized a commitment to honor the contracts purchased by families.

"It will give [the families] peace of mind," she was quoted as saying in The Birmingham News. "They completed their end of the bargain, and they deserve to know their students will be able to participate in college PACT benefits."

Similarly, the Fort Worth Star-Telegram reports that state Representative Richard Pena Raymond announced that the state's House Appropriations Committee will soon be reviewing the Texas Guaranteed Tuition Plan to explore solutions to fix the plan's shortfall of over a billion dollars. He noted that he expected recommendations by next November.

"I think part of what we will do is look at the issue of higher education in the state of Texas and what it costs students to go," he was quoted as saying in the Star-Telegram. He said that he hoped the study will ultimately provide solutions for reining in soaring tuition costs.

The original plan allowed families to prepay costs for Texas public and private colleges and universities years in advance while locking in rates guaranteed to cover the cost of higher education in the future. The plan also allowed families to receive a refund of everything paid along with the investment return if a student over 18 years old decided against attending college.

But significant increases in tuition combined with lower-than-expected investment returns forced the plan to change its terms. The plan closed to new enrollments in 2003, after the state Legislature deregulated tuition. Then it was announced that participants cancelling their contracts after November 30 would only receive their original investment minus administrative fees.

Since the announcement in August, some 7,000 investors have pulled out of the plan. After investors and lawmakers protested, the previous refund policy was reinstated in the beginning of November, and close to 500 people who pulled out of the plan got back in.

Now lawmakers are looking for other solutions to save the plan, which is projected to run out of money in 2015. According to R.J. DeSilva, spokesman for the state comptroller's office, the program has about 102,000 active contracts.

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