Recent controversy over one state's use of the funds in its college savings plans has raised new concerns for parents and students across the country with money in 529 plans.
In a game of fiscal hot potato, the Nevada legislature re-allocated money from a state scholarship fund to the state's budget gap last year; the state later took $4.2 million worth of accumulated fees from 529 plan reserves to cover the shortfall in the scholarship fund, according to a recent report from the Nevada Policy Research Institute, a conservative think tank. The plans' overseers had other intentions -- traditionally, those monies have been used to support the plans -- and critics now say the result could be higher fees and a weaker prepaid tuition plan.
While the move is within the state's authority, experts say it is also believed to be the first time any state legislature has reallocated funds that have historically been used to benefit the plan itself or the plan beneficiaries. "To have the legislature come in and take those funds away is troubling and novel," says James Canup, a Virginia-based attorney and the vice chair of the College Savings Plans Network Corporate Affiliate Advisory Board. And at a time when states are looking for new and creative ways to patch growing budget shortfalls, Canup says, it raises the question: Could other states follow Nevada's lead?
Most states have some rules about how revenues from a 529 plan can be used, but in many including Nevada they allow for a lot of flexibility, says Andrea Feirstein, managing director of AKF Consulting Group, which advises states that administer 529 plans. And if state legislatures deem it necessary, most have the potential to shuffle money from 529 plan fees in a similar manner, says Canup.
In Nevada, fees can be used for anything that helps state residents get a college education. Helping to patch the state's general budget gap doesn't qualify, but funding the state scholarship in question does, says Lorne Malkiewich, director of Nevada's Legislative Counsel Bureau, which gave the state's legislative committee the green light to transfer the funds to the scholarship program.
In practice, most plans apply the revenues to plan expenses and often marketing -- an effort which aims to attract more investors, which in turn can result in lower fees for everyone. In the case of Nevada, the college savings board had planned to use some of the fees to promote the plan in the state's public schools, a program that was delayed a year.
Separately, that $4.2 million in reserve would have increased the cushion for the state's prepaid tuition plan, which has for 13 years offered parents the chance to purchase state university credits at today's prices and use them to pay for college in the future. The program is only as solvent as its reserves; unlike, say, state bonds, it is not guaranteed by the state. By shifting this money elsewhere, the state may be less prepared to cover the costs of those credits if its prepaid tuition plan runs into problems down the road, says Joe Hurley, founder of SavingforCollege.com.
Given the budget squeeze many states are facing, Canup says, more legislatures might be willing to do what Nevada did. The calculus of the state's decision will be familiar to anyone who's ever juggled bills: According to minutes from the meeting of the state's interim finance committee, the state decided to move money from the 529 plan coffers into the scholarship fund because the scholarship's obligations were only a few weeks away, while the needs of the college savings and prepaid tuition plans were relatively less pressing.
The state says concerns are overblown. The prepaid plan is running a surplus, and parents haven't been harmed by the re-appropriation of money, says Steve George, the state treasurer's chief of staff. Investors' 529 college savings plan balances haven't been touched -- that is forbidden by law.