Md. prepaid tuition plan draws near Plan that opens in '98 is a risk, analysts say, but may yield savings

Payments at current rates

State invests money paid in by parents while child grows up

November 30, 1997|By Mike Bowler | Mike Bowler,SUN STAFF

With a 3-year-old, a 5-year-old and a third child due next month, Paul and Kira Muller stare down a long, dark tunnel at college costs beginning in 2009, 2011 and -- it seems inconceivable -- 2014.

So the prospect of guaranteeing today's tuition rates for their children when they enter college in the 21st century is very attractive to the Mullers. "It looks like a hell of a deal to me," says Paul Muller, 32, who lives in Upper Falls in northeastern Baltimore County and is guidance chairman at Catonsville High School.

Maryland's prepaid college tuition program, which will open for business early next year, may be just the ticket for the Mullers.

The plan works this way: When their children are young, the Mullers and other Marylanders may contract to pay four years of tuition at current rates charged by the University of Maryland (or two years of tuition at a Maryland community college).

When their children reach college age, they have their tuition covered at the state college of their choice, even if it's 2014 and tuition at University of Maryland, College Park is, say, $50,000.

If participants go to Maryland private or out-of-state colleges, the plan will pay but only the amount specified in the contract, which is keyed to tuition at state institutions.

The state invests the parents' funds, assuming that the return over the years will at least keep up with increases in tuition. In effect, it's a state-managed individual retirement account for college, with taxes on the profits deferred until they're withdrawn.

Sounds like a wonderful deal, but as with any investment, there are dangers, say financial experts and college officials.

While public college tuition rates nationally have increased by 8.7 percent annually for 15 years, recently there have been some signs of more moderate inflation in college costs. If investment returns begin to regularly exceed tuition increases, the prepaid plan might not be a good investment.

Marylanders should see how much flexibility is in the plan, says Ellen Frishberg, director of financial aid at the Johns Hopkins University. "We had a student from Michigan whose father had started in a plan 10 years ago, assuming she'd go to college in Michigan. When she chose Hopkins, all he had to show for 10 years was the principal, because the Michigan plan wouldn't pay the interest out of state."

The Maryland plan has out-of-state portability, but if parents cancel contracts, they'll get all the money paid but only half the interest earned, says Edwin S. Crawford, head of the Maryland Higher Education Investment Program.

An investment banker and chairman of the UM board of regents' Finance Committee, he says the Maryland plan, enacted by the 1997 General Assembly, "is designed to be as simple as possible. Otherwise, it becomes an administrative nightmare."

Crawford says the plan is "not meant to compete with those who are more comfortable managing money through a broker. It's entirely possible that you can do better in the market. But if you want regularity, if you want the comfort of knowing the money will be there, and that your investment will be wisely, if conservatively, managed, this is the plan for you."

Robert Williams, an Ellicott City financial planner, cites another advantage of tuition prepayment plans: "They'll force people to save. The sad fact is that few parents save anything for their children's higher education."

On the other hand, Williams adds, "The more you lock yourself in, the more you're gambling."

Maryland hasn't yet set the plan's initial contract prices -- actuaries are at work on that, Crawford says -- but earlier speculation was that they would range to as much as $130 a month for children who enter the plan when they are in middle school.

In his head, Muller does the math for his unborn child. Even if he had to pay $130 a month for 17 years, Muller calculates, "Let's see. That's less than $30,000. Will four years at the University of Maryland cost more than $30,000 in 17 or 18 years? I'll bet it will."

UMCP will charge $3,894 next fall, or $15,576 over four years without tuition increases.

Eighteen states have prepayment plans in operation, Crawford says. Now that Congress has codified tax treatment of the plans, in effect endorsing them, more states are expected to climb aboard.

This worries Michael Olivas, a University of Houston law professor who predicts that thousands of children arriving on campus with prepaid tuitions will eventually put tremendous pressure on colleges and prompt them to drop "needs-blind" admissions policies to accommodate those whose bills are covered. For example, in Florida over the next 18 years, 337,000 children who have prepaid tuition accounts will show up at the state's universities, according to a recent report.

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