College costs keep rising, and recession-scarred> parents need all the help they can get, but several cash-strapped states are abandoning or adjusting one of the most popular college-savings options: prepaid tuition credits for college-bound kids.
The latest casualty may be Washington state, where legislators announced last week that the state's popular prepaid tuition plan, called Guaranteed Education Tuition (GET), may be in need of an overhaul. That comes on the heels of Tennessee's recent decision to shut down its prepaid college tuition plan, making it the eighth state to do so in the last few years. And in Alabama, legislators are facing a class-action lawsuit brought by parents who say that state's plan is underfunded by $269 million if tuition climbs at its current pace at some of its most popular schools. As of now, only 11 states have plans that are still open to new investment.
That's bad news for a growing number of parents who, still shaken by stock market losses, have come to depend on these plans, which allow parents to purchase university credits at today's prices, and use them at some indeterminate time in the future. Enrollment in Washington's prepaid plan was up 19% this year. In Pennsylvania, where the plan is not threatened, enrollment in the state's 529 Guaranteed Savings Plan rose 15.6% this year.
But investors with outstanding credits in states where they have shut down plans shouldn't worry, say experts: Plans have so far made good on their promises. "If you're already in the program, those terms will not change," says Betty Lochner, director of the GET Program in Washington. The $1.4 billion plan is solvent, she says, but legislators plan to study their options in preparation for a potential shortfall. The plan, which opened to investors in 1998, originally anticipated that tuition would rise 8.5% per year. Now state officials expect costs to rise 11% a year for the next two years. Tuition jumped an average of 13.1% per year from 2009 to 2010.
Those who want to start investing in a plan should act quickly, since other states may soon close their plans to new investors, say experts. "Given where state budgets are, if something were to happen to the prepaid plan, states are not going to be in a position to put resources into helping them," says Jackie Williams, director of the college-savings initiative at the New America Foundation, a nonprofit, nonpartisan public-policy institute based in Washington. She was executive director of the Ohio Tuition Trust Authority, which, like Kentucky and West Virginia, closed its prepaid tuition plan to new families after the dot-com bubble bust.
When considering your state's prepaid tuition plan, it's important to read the fine print, says Andrea Feirstein, a consultant to states and public 529 plans: Some states are not obligated to bail out the programs if they fall into the red. As it is, she says, prepaid plans "are a good value only if you think your child will attend an in-state school."
Others aren't even sure that's a good idea. Tim Utecht, chief investment officer for Life Planning Partners in Jacksonville, says he stopped recommending the Florida Prepaid College Plans to clients after it raised costs this year to reflect an anticipated an increase in tuition. "The prepaid plan was more attractive five, six, seven years ago," he says.
Families in states without a prepaid plan might consider the Tuition Plan Consortium, a national group of private and universities, which sponsors the Private College 529. The plan allows families to purchase Plan tuition certificates, which can be redeemed for tuition even if it rises at about 270 schools in the consortium. Surely Junior will want to go to one of them.