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March 10, 2011 10:00 AM “Prepaid” Tuition, a Myth of the Guilded Age?

By Daniel Luzer

It looks like prepaid college tuition plans—a policy that allowed families in many states to pay for their children’s future college tuition at today’s prices under the assumption that tuition accounts would accrue interest at a rate that more than covered tuition increases—may turn out to be the symptom of a bygone age of affluence.

The trouble is that when the economy soured the accounts not only generated less revenue; states increased tuition. Illinois is the latest state to discover that its prepaid tuition program wasn’t terribly well managed.

According to an article by Steve Daniels and Paul Merrion in Crain’s Chicago Business:

The Illinois program was 20 percent underfunded as of June 30 when assessing its assets against liabilities over the long term, according to a year-end actuary’s report. That was a turn for the better from the 32 percent shortfall of a year earlier, but virtually all that improvement came from an accounting change that blunted the effect of recent investment losses by spreading them out over five years. Without that change, the fund’s shortfall narrowed only to 31 percent.
That figure, which is based on the same accounting method used by all state prepaid tuition plans that are still open, makes Illinois the worst-funded of these 12 state programs. Investment assumptions that outsiders say are overly optimistic suggest the hole is deeper than that. Even if the fund reaps the gains its administrators count on, the program wouldn’t be fully funded until 2022.

That the College Illinois Prepaid Tuition Program is supposed to shelter the parents of future college students from “the market’s fluctuations.”

But the health of the program, like those in other states, actually has everything to do the market’s fluctuations. If the fund doesn’t generate enough money Illinois families need an appropriation the state legislature. The state can’t promise that the tuition program will actually make the money it needs to cover tuition, whatever it is in 12 or 18 years.

Only 11 states now have plans where families are still allowed to make new contributions. Washington state’s plan is gone. So is Alabama’s. Many other states have tuition plans that are very unstable.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer