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NATIONAL CENTER FOR POLICY ANALYSIS
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Prepaid College-Tuition Plans Are Under-Performing
Daily Policy Digest

Education Issues / Tax Credits & Education Savings Accounts

Wednesday, December 18, 2002
Once regarded by parents as rock-solid bets, prepaid college-tuition plans are threatened by slumping investment returns and soaring tuitions.

Nowhere is that more evident than in Colorado, where the state's treasurer has concluded that the fund may eventually be unable to cover its obligations. As a result, state officials have told the fund's 7,800 enrollees they must either withdraw from the plan and have all their payments returned or accept future benefits that may not cover four years of tuition at a state university.

Similar problems may soon overtake other states' programs.

  • More than a million U.S. families use such state programs as the basis of their college-savings strategies -- sinking $7.92 billion into them.
  • Although operating procedures and financial guarantees vary from state to state, the plans allow parents to pay a sum near today's tuition price to cover all or part of tomorrow's tuition bill.
  • None of the 20 plans around the country has actually missed a tuition payment, but as the stock market's slide has wrecked havoc with plans' income projections, many plans are projecting actuarial deficits for the first time.
  • As state legislatures slash funding for higher education, four-year state schools increased tuition and fees by an average of 9.6 percent last year -- although the rate at some schools was more than double that.
Plan administrators emphasize they are not talking about an immediate cash-flow problem, but a long-term deficit. One official described the present outlook as "sort of like Social Security."

Source: Robert Tomsho, "Prepaid College-Tuition Plans Are Falling Short," Wall Street Journal, December 16, 2002.

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