Market endangers prepaid tuition plans

MONTGOMERY, Ala. -- State-run trust funds for parents who want to pay off college tuition before their children enroll are running short on cash, and program officials worry they won't be able to pay for students who are counting on the money.

The rising cost of college and plunging stock market have combined to create a disparity between what some of the 18 states' prepaid tuition plans have on the books and what they're supposed to pay. The worst case is in Alabama, where the sour economy has sliced off nearly half of the fund's assets, and state officials are telling parents the full cost of college isn't a sure thing.

The board overseeing the plan there is scrambling after assets lost 48 percent of their value since September 2007, and they have only about half of what they need to pay what families are expecting. Unless the market shifts quickly or the plan receives an infusion of cash, it would run out of money after nine more years of paying full tuition. The plan could also reduce payments to families.

"I thought the money was in the bank," said Montgomery lawyer Larry Menefee, who was caught by surprise when he received a letter telling him tuition for his triplet sons wasn't guaranteed.

He was counting on the money to help cover costs for the three, who are starting college in the fall. He has saved literature since his children entered the program, and letters in his file promise it will "will guarantee payment," even though administrators now say the state law setting up the program never guaranteed full coverage of tuition.

The pain isn't just being felt in Alabama. Among the other states with fewer assets than anticipated liabilities are Tennessee, South Carolina, West Virginia and Washington. Seven of the 18 -- Florida, Maryland, Massachusetts, Mississippi, Texas, Virginia and Washington -- back their plans if money runs short, according to college savings organizations and state officials.

The programs became popular 20 years ago as a way for parents to pay a fixed amount when a child was young for tuition at a lower price than what they'd pay if they waited until the child enrolled. The states running the programs, which are one type of the investment device known as a "529 plan," expected the investments' earnings would exceed the cost of tuition.

But in the last five years, tuition increases have doubled the rise in the rate of inflation, and more recently the market has tanked. To cope, some states have frozen enrollment, redesigned their programs or charged parents more.

"Just like people are seeing their 401(k)s and their investments getting hit, that's what is happening to people's college investment plans," said Steve Curry, assistant to Tennessee's treasurer. That state's plan ended last year with assets falling $12 million below the present value of future benefits.

He said the state can make up the difference by the stock market turning around or by transferring money from the state budget. Neither of those has happened yet.

Mark Kantrowitz, publisher of the website FindAid.org, said many state plans are being hit from two sides. Their investments are dropping in value and public universities are raising tuition by higher-than-normal amounts because the economic downturn is shrinking state funding for higher education.

Despite the problems, no plan has failed to pay tuition this school year, he said. Whether that will remain true in future years isn't clear.

Alabama's Prepaid Affordable College Tuition Plan has seen the value of its assets drop from $899 million in September 2007 to $463 million at the end of January. State Treasurer Kay Ivey, who oversees the program, has sent letters to the nearly 49,000 participants warning the program "is hurting like every other retirement fund and investment account."

"Is there enough money to pay all the obligations? No," Ivey said. The plan will meet later this month to decide what action to take.

West Virginia's plan stopped letting people enroll their children more than four years ago. Its investments have lost $23 million since July 1, or nearly 27 percent of their value, said Greg Stone, spokesman for the state treasurer's office.

"We do have quite some time to make this up. We can only anticipate that things will get better. They can't get much worse," Stone said.

Programs have also stopped allowing new families in South Carolina, Ohio, Kentucky and Colorado. Texas stopped taking new students in its first prepaid college plan in 2003 due to a sudden rise in tuition, but later started a new one.

South Carolina made that move in 2006 after years of rising tuition and shrinking state support. At the end of June 2008, it had $189 million in liabilities and assets of $152 million -- a shortage of $37 million. Officials there are waiting to see if the stock market will turn around and close the gap.

Officials in Colorado aren't worried about making future tuition payments even though it lost $2 million from 2007 to 2008, said spokeswoman Jennifer Robinson.

In Washington, where Guaranteed Education Tuition officials said they expect to raise prices for parents, University of Washington President Mark Emmert recently told a legislative committee that the program is worth saving. "The challenge, of course, is that you can't set a policy that will keep the GET program solvent by making universities and colleges insolvent," he said.

Invested families, though, aren't thinking of the situation in terms of government policy. Leah Beth Downs, a junior at the University of North Alabama, said she and her sister have been in Alabama's plan since they were youngsters in Athens, Ala., and they are counting on it to keep paying their full tuition each semester.

"My mom's an educator, so it's not like there is a lot of money. If it didn't pay, we'd have to take out loans," she said.

On the Net:

Saving for College: http://www.savingforcollege.com

Contributing to this report were Associated Press Writers Donna Gordon Blankinship in Seattle, Wash.; Kristin Hall in Nashville, Tenn.; Brian Farkas in Charleston, W.Va.; Catherine Tsai in Denver; Jim Davenport in Columbia, S.C.; and Ann Gibson in Lexington, Ky.