Tuition Plans: Pay Now, Pay Later
By SANDRA SALMANS
New York Times
April 13, 2003
It seemed like a good deal: pay for tomorrow's college tuition at today's prices. But parents are discovering there are no bargains.
Squeezed by a three-year stock market slump and rising tuition costs, most of the 19 states that offer prepaid tuition plans are sharply increasing their prices, in some cases well above the current cost of tuition. ''Many new enrollees are facing sticker shock,'' says Joseph F. Hurley, the founder of savingforcollege.com, a Web site devoted to college savings vehicles. And one state, Colorado, has warned families that the tuition units they have already bought may be worth only a fraction of their face value by the time their children are ready for college.
Until recently, prepaid tuition plans were a safe if unspectacular way to save for college. They did not offer the potential return of the other type of state-sponsored, tax-free 529 program -- college savings plans, which let investors bet on the market. But tuition plans avoided the potential losses. More than a million families poured $8 billion into prepaid plans, buying either individual tuition units or contracts for a year or more at public colleges in their home states. For a price only marginally higher than today's tuition, they locked in tuition 5, 10, even 20 years away. The states invested the funds and hoped the returns would cover increases in tuition.
That arrangement worked as long as the stock market continued to soar and tuition didn't. But in the last couple of years, both of those elements failed to cooperate. With state legislatures reducing funds for higher education, four-year state institutions increased tuition and fees in the last academic year by an average of 10 percent, according to the National Center for Public Policy and Higher Education. In some states the increases were far worse -- 24 percent in Massachusetts and 20 percent in Texas, Missouri and Iowa.
The situation became particularly desperate in Colorado, where the government does not promise to make up the shortfall between what parents pay and what tuition will ultimately cost. As a result, the state closed the plan to new members last year. It also gave current members until February to withdraw their money from the plan (about one-third did) or take the chance that their prepaid tuition units would appreciate only 5.5 percent annually, regardless of how much tuition increased during the same period. Parents would have to make up the difference. If, for example, tuition goes up 8 percent a year for the next decade, parents who pay $10,000 for their 8-year-old today will have to chip in an extra $1,150 a year when their child becomes a college freshman.
''It was pretty explicit'' that the state never guaranteed the value of a tuition unit, says Debra DeMuth, director of the Colorado Student Obligation Bond Authority, although she concedes that some people were probably under the impression that it did.
So far, other prepaid tuition plans have limited themselves to raising prices. In Ohio, for example, where annual tuition increases had historically been capped at 6 percent, tuition rose 22 percent between September 2001 and last January. In roughly the same period, the price of a prepaid unit rose six times, from $51 to $81.50 (100 units buys about one year's tuition, so a prepaid year went from $5,100 to $8,150).
''We're rebuilding our reserves,'' says Jacqueline Williams, executive director of the Ohio Tuition Trust Authority, which projects tuition will go up at least 10 percent annually for the next three years. Ms. Williams says that in 15 years, even with the large price increases, the plan will be operating at a loss.
If finances worsen, other states may be forced to restructure their plans. Over the next few years ''you'll see some states discussing whether they will accept new members,'' predicts Diana Cantor, chairwoman of the College Savings Plans Network and head of Virginia's prepaid program, which raised prices 25 percent last year. For the moment, however, people continue to join. ''We are continually amazed at the demand,'' Ms. Williams says. ''People are aware of what's going on in the marketplace. They understand that tuition isn't going down.''