State prepaid college tuition plans fret over potential deficit

COLUMBUS, Ohio -- Most of the 20 states that offer prepaid college tuition plans are raising rates to stay afloat amid concerns the economic downturn and rising school fees could cause multimillion-dollar deficits.

Some states also limited the number of new families allowed in the programs by shortening enrollment periods.

The plans allow parents to lock in the current cost of tuition for use in the future either by purchasing "units" of tuition or contracts with states. The money is released when the child is ready for college.

Costs are based on tuition and fees at four-year public universities, which according to the College Board went up 9.6 percent on average nationwide this academic year. That was far more than states had anticipated when they set rates.

When the fiscal year ended June 30, many of the 20 states projected that they could have multimillion-dollar deficits over the next 10 to 15 years if the economic slump continues and tuitions keep rising. Until then, states that opened prepaid tuition plans in the 1990s had projected surpluses.

"There's no reason to panic right now," said Diana Cantor, chairwoman of the College Savings Plans Network and executive director of Virginia's fund. "It's just an indication that if things continue along the same path, there could be a problem."

Despite rising costs for prepaid tuition, parents still see the programs as a better alternative to waiting until their children are of college age.

"It's probably pretty much a foregone conclusion that tuition will not go down, so I'll continue to buy as many as I can," said Mark Gutter, an Ohio accountant who has three children ages 5, 8 and 12.

Ohio, which projected a potential $46 million hole, raised unit costs four times in the past year to $82 a unit, a 53 percent overall increase. The fund's executive director, Jackie Williams, said the cost could increase again if tuition at Ohio's 13 public four-year universities continues to rise.

The state Legislature eliminated a 6 percent cap on annual tuition increases around the same time the economy nose-dived, causing the fund's investments to fall short of its projected 7.5 percent return rate.

West Virginia delayed its enrollment period two months to Nov. 1 and raised prices 15 percent. Those moves followed warnings in September that the state would be $16 million short if everyone invested in its tuition fund cashed in.

Tennessee, which projected a $6 million deficit, considered closing its program to new families, only changing its mind after lawmakers agreed to provide more education funds and cap tuition hikes. The program still raised prices 4 percent.

Washington, which projected a potential $21 million deficit, increased unit prices 24 percent to help rebuild the $4.5 million reserve fund it drained last year as it paid out tuition commitments.

"If we had about five years like this, we may be in trouble," said Betty Lochner, the program's director. "But it's early enough now that we can adjust."

Some parents say they are relieved that the leaner economic times did not affect their children's prepaid college funds, which Ohio guarantees. They say friends who opted for more traditional investment programs saw their children's education money dissipate when the stock market dropped.

"While my investment portfolio has not done well, those credits are there ready to pay for college because the state guarantees them," said Bill Burns, a Columbus marketing manager who now has enough units to put his two teenage children through college. "We're not in the boat that some of our friends are in right now -- relying on programs that weren't guaranteed."

------

On the Net

www.savingforcollege.com/

www.collegeparents.org/

www.collegesavings.org/