Prepaid Tuition Plans Take A Hit

A combination of rising costs and plummeting investments has forced several states to suspend enrollment in prepaid tuition plans designed to protect families against spiraling expenses at public colleges.

Ohio announced last week it was suspending its program for a year because the state was losing money. West Virginia, Kentucky and Texas also have temporarily cut off new enrollment, and earlier this year Colorado halted enrollments in its plan completely.

Prepaid tuition plans allow families to purchase tuition credits based on the current rates — in lump sums or monthly payments. A state then pools the money in long-term investments, hoping that earnings will match or exceed the cost of tuition years later when a child is ready to attend college.

Now, the problem is tuition is rising faster than investment earnings.

Charles Bockway, a spokesman for the West Virginia Prepaid Tuition Plan, said the confluence of tuition increases topping 10 percent and the slow economy, which hurt schools' investments, caught many financial experts by surprise.

"Our research shows this has never happened before," Bockway said. "Typically, when you had periods of high tuition growth you had periods of high inflation. And during high inflation times you earn a lot in bonds and the stock market is doing well."

Every state in the country offers programs that provide tax incentives for college investment, and — coming into this year — 20 also provided investment options tied to current tuition prices.

The College Savings Network Plan, an affiliate of the National Association of State Treasurers, said 1.7 million Americans are invested in prepaid plans.

In places where programs have been suspended, states are allowing those with money already invested in prepaid plans to keep the funds there, although they also are being given other investment options.

Dr. Paul Kolodzik, an Ohio emergency room doctor, stopped investing in his state's fund before it was suspended because escalating tuition was causing his premiums to rise.

"For them to step back and take a breather, I don't know that it's such a bad idea," said Kolodzik, the father of three. "Because the program's not working right now."

Enrollment in the Texas Guaranteed Tuition Plan was suspended until the state's public colleges and universities stabilize tuition, said spokesman Andy Ruth. In May, the Texas legislators deregulated tuition and allowed each public school to set its own rates.

Craig Tounget, the executive director of the Texas Parent Teacher Association, said the full significance of the suspension won't be known until the program is reinstated. If the cost of tuition "comes back a lot higher, I might hear a lot more complaints," he said.

Diana Cantor, chairwoman of the College Savings Plan Network and the executive director of Virginia's college savings program, predicted the prepaid programs will rebound along with the investment markets.

But the president of the National Association of Student Financial Aid Administrators said suspended tuition plans are another signal that the burden of financing colleges is being shifted to families.

"It leaves people in a situation where they have to find another mechanism" to pay for college, Dallas Martin said.