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Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.
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January 16, 2003
"The Demise of Prepaid College Tuition Plans"
There are 18 states that currently offer prepaid college tuition plans, in
which the state guarantees to cover the cost of college at most colleges in
their state -- no matter high tuition rises -- in exchange for regular
investments over several years by the parents. More than one million
families have invested over $8 billion in these plans.
But the plans are running into trouble because of two negative forces:
- College tuition costs are rising faster than anticipated
- Investment returns have been lower than expected because interest rates
have fallen so low
As a result, several states are now reporting deficits in their plans of
millions of dollars -- that are growing larger each year. Ohio’s deficit is
$46 million and Maryland’s is $30 million, for example. In theory, the state’s general fund is supposed to make up any shortfalls, but with huge
deficits in state capitals all over the country, states are reluctant to
step up to the plate and pitch in.
The result is that many of these prepaid tuition plans are being radically
altered or, in some cases, being phased out in favor of the state’s Section
529 college savings plan, which offers no state guarantees. Here are some of
the latest developments:
- Tuition promises are being dropped: Colorado has stopped making the pledge
and says it will replace the prepaid plan with a guaranteed investment
contract which will give a fixed rate of return, but no guarantee on
covering tuition costs.
- Participation is being limited: In Florida, a task force is looking at
limiting enrollment to only low-income residents; Wisconsin stopped selling
its plan to new enrollees in December.
- Prices are being raised: Maryland raised prices by 30% and Illinois 23% to
make up the difference, which is making the prices unaffordable for many.
For example, it now costs $8,000 a year to join the Ohio plan, which is 40%
more than a year at Ohio State for an in-state resident -- so, it doesn’t make
sense to join the plan.
The demise of the prepaid college tuition plans is similar to the demise of
the defined benefit pension plan, where employers took the risk of investing
in return for a fixed benefit. Most corporate plans now offer a defined
contribution plan instead, just as all states now offer the Section 529 plan
for college savings, which shifts the investment burden onto the parents.
If you would like to know more about 529 plans and other college savings
vehicles, look at my "Everyone’s Money Book on College," which you can get at
www.moneyanswers.com.
For More Financial Tips From Jordan Goodman
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