College Tuition Prepayment Plans Stumble

Perhaps the most heartbreaking casualties of recent stock market performance are the 20 state-sponsored college tuition pre-payment plans throughout the country. With college costs continuing to grow at a pace of about 9% per year and investment returns on plan assets being flat or negative, the sponsors of the various prepaid tuition programs now project long-term cash shortages.

Investors in the program thought that they had purchased “paid up” tuition credits under the program, regardless of the future rise in tuition costs. But now states anticipate notifying investors hat the plan cannot meet its projections, and so the investors must “pay up” by making additional investments or bail out of the program. Colorado has already notified investors of the default and other states anticipate similar actions in the future. Other states are considering more creative options. Most plans agree that the growth of plan assets will not keep pace with college tuition inflation over the next decade.

Investors are irked because they thought that these plans represented a guarantee backed up by the sponsoring state and are shocked to learn that this is not the case.

Of course, a recovery of the financial markets will greatly help ease the burden, but many investment advisers do not expect that to happen in the near future.