After reading about the woes of the Alabama Prepaid Affordable College Tuition Program and the importance of state guarantees, I decided to review other states' prepaid tuition plans to determine what guarantees, if any, they have in place, to protect families and their investments. I came across this USA Today article in 2002 which highlighted difficulties these plans were having back then.
Why are these plans in a precarious position today? They have two factors working against them: significant increases in tuition at state schools due to cuts in state support (Florida is projecting a 15% increase, Tennessee 9% to provide a few examples) while investment returns have been abysmal in the last year with 50% declines in most major indices. This creates an actuarial crunch in these plans which is why these state guarantees have suddenly become more important. Although our research only found that 40% of plans had some form of state guarantee, if the other funds should run into difficulties, political pressures (these funds in many instances are run out of the state treasuries), may require some bailout, although with state coffers stretched this could be a challenge.
Here is a summary of my findings of 17 states that had a plan listed on finaid.org:
- 5 of the 17 are no longer accepting new investors
- Only 40% of the plans (6 out of the 15 that I could find information on) provide some form of guarantee to investors in these plans.
| State | Guarantee | Notes |
| Alabama | No | |
| Colorado | No | Closed to new investors |
| Florida | Yes | Only those within 5 years of enrollment get guarantee if fund runs into problems |
| Illinois | No | |
| Kentucky | No | Closed to new investors |
| Maryland | Yes | Legislative guarantee |
| Massachusetts | Yes | Bonds backed by full faith and credit |
| Michigan | No | |
| Mississippi | Yes | |
| Nevada | No | |
| South Carolina | No | Guarantees interest of 4%, Not accepting new apps. |
| Tennessee | No | |
| Texas | No | |
| Virginia | Yes | Financial guarantee from State |
| Washington | Yes | Guaranteed by State law |
| West Virginia | N/A | Closed to new investors |
| Wisconsin | N/A | Closed to new investors |
Alabama Prepaid Affordable College Tuition Program
"The obligations of the PACT Contract are not backed by the full faith and credit of the State of Alabama."
Colorado Prepaid Tuition Fund (closed to new participants)
"The Colorado Constitution and other State laws prohibit the State from providing its full faith and credit to obligations of other entities, such as the Prepaid Tuition Fund. As a result, payments from the Prepaid Tuition Fund are not guaranteed in any way by the State, and are not considered to have created a debt or obligation of the State. Such payments are limited obligations, payable from the Prepaid Tuition Fund but not from the other assets of CollegeInvest. In accordance with State law, if it is determined that the Prepaid Tuition Fund is not actuarially sound as determined by an annual actuarial valuation, CollegeInvest may direct the distribution of available assets. If it is determined that the Prepaid Tuition Fund is not financially sound as determined by an annual audit, then the CollegeInvest may discontinue permanently or for a period of time may suspend that particular aspect of the Prepaid Tuition Fund and the execution of additional contracts. As of August 1, 2002 the Fund was closed to new investors."
"Financially guaranteed by the State of Florida, pursuant to Sections 1009.98 (7) and (8), Florida Statutes, stating "the state shall agree to meet the obligations of the board to qualified beneficiaries if monies in the fund fail to offset the obligations of the board. The Legislature shall appropriate to the Florida Prepaid College Trust Fund the amount necessary to meet the obligations of the board to qualified beneficiaries. In the event the state determines the prepaid program to be financially infeasible, the state may discontinue the program. Any qualified beneficiary who has been accepted by and is enrolled or is within 5 years of enrollment in an eligible independent college or university or state postsecondary institution shall be entitled to exercise the complete benefits for which he or she has contracted. All other contract holders shall receive a refund of the amount paid, and an additional amount in the nature of interest at a rate that corresponds, at a minimum, to the prevailing interest rates of savings accounts provided by banks and savings and loan associations."
College Illinois 529 Prepaid Tuition Plan
The Fund is the repository of all moneys received by the Commission in conjunction with the Program. Benefits are limited to the assets of the Fund and earnings thereon. In addition, Section 130 of the Act provides the following obligation: (A) If the Commission determines that there are insufficient moneys in the Fund to pay contractual obligations in the next succeeding fiscal year, the Commission shall certify the amount necessary to meet these obligations to the Board of Higher Education, the Governor of Illinois, the President of the Senate of Illinois, and the Speaker of the House of Representatives of Illinois. The Governor shall submit the amount so certified to the General Assembly as soon as practicable, but no later than the end of the current State fiscal year. Nevertheless, neither the credit nor the taxing power of the State of Illinois is pledged to the payment of Benefits under a Contract. (B) In the event the Commission, with the concurrence of the Governor, determines the Program to be financially infeasible, the Commission may discontinue, prospectively, the operation of the Program. Any Beneficiary who has been accepted by and is enrolled or will within five years enroll at an Eligible Institution shall be entitled to utilize the all of the Benefits of his/her Contract. All other Contract holders shall receive an appropriate refund of all contributions and accrued interest up to the time that the Program is discontinued. No Purchaser or Beneficiary may direct the investment of any contributions to the Program or any earnings thereon directly or indirectly. The Program shall provide a separate accounting for each Purchaser and/or Beneficiary. Any claim by the Purchaser or Beneficiary against the Commission pursuant to a Contract shall be made solely against the assets of the Fund. No recourse shall be had by the Purchaser or Beneficiary against the Commission’s members or its officers, agents or its employees individually, or against the State of Illinois in connection with any right or obligation arising out of any Contract.
Kentucky's Affordable Prepaid Tuition (KAPT) (Not accepting new applications)
"Kentucky law provides that your KAPT contract constitutes an irrevocable pledge and guarantee by the Fund to pay tuition of a qualified beneficiary in accordance with your purchased tuition plan and your Master Agreement. You should also be aware of the following. First, payment of the tuition guarantee is contingent upon the Fund consistently meeting its investment targets. Your KAPT contract is not backed by the full faith and credit of the Commonwealth of Kentucky; this means that the General Fund of the Commonwealth is not obligated to fund any KAPT tuition liabilities. However, under current law, 75 percent of the State Treasurer’s Unclaimed Property Fund (currently $80 million), may be used to fund any KAPT shortfalls."
Maryland Prepaid College Trust
"Prepaid College Trust is backed by a Maryland Legislative Guarantee."
MEFA's U.Plan Prepaid Tuition Program (Massachusetts)
"By purchasing "Tuition Certificates" backed by Massachusetts general obligation bonds, U.Plan participants are guaranteed that the portion of tuition they buy will keep pace with college inflation. U.Plan bonds are not subject to Massachusetts state income tax and are believed to be free of federal income tax as well. If U.Plan bonds are not used for tuition at a U.Plan college, the investment return will accrue interest at the rate of the Consumer Price Index(CPI) each year. Payments on the Tuition Certificates are backed by bonds secured by the full faith and credit of the Commonwealth of Massachusetts."
"(c) Actuarial Unsoundness: To protect Purchasers and Beneficiaries, an actuarial review of the Plan shall be made annually. If a nationally recognized actuary determines that Plan D does not have sufficient funds to ensure the actuarial soundness of the Plan and the Board determines that there are insufficient numbers of new Contracts to ensure the actuarial soundness of Plan D, MET shall terminate all Plan D Contracts and prorate the assets of Plan D among the existing Contracts. If Plan D is liquidated, the amount to be returned is uncertain and could be less than the Prepaid Tuition Amount."
Mississippi Prepaid Affordable College Tuition (MPACT) Plan
"If you’re shopping around to find the best option to save for your child’s future education, MPACT is the only prepaid tuition plan available that is guaranteed by the State of Mississippi . MPACT does not guarantee admission to college. Students must still meet the requirements for college admission.
Nevada Prepaid Tuition Program
*Enrollment is open from January 21, 2009 through April 24, 2009. The contract prices shown are based on current actuarial assumptions (such as tuition costs and investment returns). Changes to these assumptions may result in Board adjustments including, but not limited to, shortening the enrollment period and changing or withdrawing contract prices. Notification of such changes will be posted pursuant to NAC 353B.200, as well as on the Treasurer’s website at: www.NevadaTreasurer.gov. Pursuant to NRS 353B.130, your contract is not an obligation of the state of Nevada and neither the full faith and credit nor taxing power of the State is pledged directly or indirectly or contingently, morally or otherwise, to the payment of the contract. The Board cannot directly or indirectly or contingently obligate morally or otherwise, the State to levy or pledge any form of taxation whatsoever or to make any appropriation for the payment of the contract.
South Carolina Tuition Prepayment Plan (Not accepting new applications as of July 1, 2008)
Is my SCTPP account
guaranteed?
The South Carolina General Assembly created
the Fund in 1997 as a separate, non-public Fund. This provision ensures that
SCTPP funds may only be used for the purposes of fulfilling program contractual
obligations. As long as your SCTPP contract benefits are used to pay
undergraduate tuition expenses, the SCTPP Fund provides that the value of those
benefits will be equal to your child’s actual tuition costs at a public college
or university in South Carolina. The SCTPP Fund is managed by the Office of State Treasurer
and evaluated, at least quarterly, by an outside independent actuarial firm. In
addition, SCTPP and the Fund must meet the federal guidelines to be an IRS 529 Qualified Tuition Plan.
Tennessee Best Prepaid Tuition Plan
A. Trust Guarantee. Notwithstanding any provision of these Contract provisions to the contrary, refunds and other benefits payable under a Prepaid College Tuition Contract shall be deemed to be due and payable only to the extent that moneys are available therefore to the credit of the BEST Prepaid College Tuition Plan, and neither the State of Tennessee nor the BEST Board shall be liable for any amount in excess of such sums.
B. Extent of Guarantee. Should the BEST Prepaid College Tuition Plan be terminated by the Board
and the assets of the BEST Prepaid College Tuition trust fund prove to
be less than would be required to fully pay all obligations of the Plan
in full, the Board shall first defray all administrative expenses of
the Plan. The Board shall then reduce payments owed pursuant to a
Contract, pro rata, to the degree necessary to bring the total
disbursement of the Plan within the amount of the remaining Plan funds. "Neither a Contract nor any return paid with a refund is insured or guaranteed by the FDIC, the state of Texas, the Texas Prepaid Higher Education Tuition Board, any other state or federal governmental agency or OFI Private Investments Inc.or its affiliates." Virginia Prepaid Education Program; "State
legislation provides a financial guarantee in each year's state budget
to cover VPEP's contractual obligations in the event of a funding
shortfall. This provision can only be changed by the Virginia General
Assembly, subject to the Governor's veto, and the General Assembly's
ability to override a veto." Washington Guaranteed Education Tuition "GET's tuition guarantee is backed by the full faith and credit of the
State of Washington. That means if future tuition increases ever
require the program to pay out more money than it has available, the
Legislature is required by state law to provide funding to cover the
shortfall. GET is one of only a few state 529 plans in the country
with a guarantee in state law." West Virginia Prepaid Tuition Plan (closed to new investors as of March 8, 2003) Wisconsin (closed to investors on December 20, 2002) Related posts:
- WSJ: Prepaid Tuition Plans Hit by Market Volatility, Rising Tuitions (March 10, 2009)
Related articles:
Wall Street Journal: Volatility hits prepaid 529's (March 10, 2009)
Comments