May 24, 2024

Your Money: College Plans You Thought Were Safe

But the state budget crises that have led to these reckonings have also put state university students and their families in troublesome situations.

In California, this has meant enormous increases in tuition. In Georgia, the beloved Hope scholarship that covered many educational costs for academically qualified students will be less generous come autumn. And in November, Tennessee stopped letting new participants into a plan that allowed parents to lock in tuition prices for their children.

It is in Illinois, however, where the discussion over what a state owes its families has become most intense in recent weeks, as scores of families in one of its 529 college savings plans realize that they may not get the returns that they thought the state had promised them.

Like Tennessee, the College Illinois prepaid tuition program allows parents to pay early to lock in prices for later. But many of those families were not aware until they read a recent article in Crain’s Chicago Business that their ability to lock in tomorrow’s prices today was not, in fact, 100 percent guaranteed. If the Illinois plan became unable to pay its obligations to families in or near college, the state legislature would not necessarily ride to the rescue to pay every child’s tuition.

About a dozen such state plans, known as prepaid 529 plans, are still open to new entrants. If you’re enrolled in one, today’s the day to go back and read the entire rulebook. But anyone saving for college (or retirement, for that matter) ought to take the following lesson away from the tale of confusion in Illinois: Even if your state tells you something is safe, you should check the fine print.

Here’s how 529 plans are supposed to work. There are two basic types. The first is a savings plan, in which you invest in a handful of mutual funds and other investments. As long as you use the money for higher education expenses, you don’t have to pay taxes on capital gains.

The second type, the prepaid savings, generally allows parents who are state residents to pay money today to lock in prices at a state university later. Families usually pay some sort of a premium over the current tuition price to make up for the expected tuition inflation in between. (There is also usually a refund available for people whose children do not attend a state college after all.)

What many parents fail to realize, however, is that states differ in how (or if) they guarantee the return on these upfront payments.

Florida, Massachusetts, Mississippi and Washington do guarantee that the state will step in to make good on the promises to keep up with tuition inflation if the fund can no longer meet its obligations because its own investments have underperformed, according to, a Web site about 529 plans. Illinois, Kentucky, Maryland, Michigan, Nevada, Pennsylvania, South Carolina, Virginia and West Virginia do not offer an overarching guarantee.

In the online version of this article, I’ve linked to a Saving for College chart with more detail on all of the prepaid plans. The chart includes some plans that are closed to new entrants, important footnotes on the Virginia and West Virginia plans and information on Texas, which is its own special case.

Illinois opened a prepaid 529 plan in the late 1990s, and like most other states, it allowed early participants to lock in prices that were much too low, in retrospect. In the states’ defense, few people anticipated that many state university systems would end up like the one in Illinois, which has raised tuition by an average of 10 percent annually over the last decade.

Just how far off was the Illinois plan’s pricing? In 2006, parents of a newborn there could buy an eight-semester contract for tuition (though not room and board) to attend its flagship university for $41,493. Today, that would cost parents $95,521, a whopping 130 percent increase in five years.

Here’s what the Illinois program promised in its various marketing materials to parents frightened by the rapidly escalating prices (all of these statements are direct quotations).

¶Prepaid tuition programs give you peace of mind knowing you have all or part of your student’s college tuition covered.

¶A College Illinois savings plan is not dependent on stock market performance, so there are no worries about a plan lessening in value.

¶Each contract holder is entitled to receive the tuition and fee benefits as stated in the contract, regardless of fluctuations in the market.

All of that sounded pretty good in late 2008 to David Mutnick, an options broker who lives in Deerfield, Ill., given that the world seemed to be falling apart around him each day at work. So he and his wife prepaid for their daughter’s tuition in full and were contemplating doing the same thing for their younger son when the Crain’s article appeared.

It reminded readers that plan managers invest the money, and the state does not guarantee that it will make good on the plan’s intent to cover tuition inflation if the investments underperform. If the fund is in danger of not being able to meet its obligations to families with children in or near college, however, it will ask the legislature for a bailout.

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