Two-tier tuition rise `blindsides' saving plan

Regents shrug off protest by chairman of Md. trust

July 12, 2002|By Alec MacGillis | Alec MacGillis,SUN STAFF

The leaders of a popular state college savings plan have alerted the University System of Maryland that a supplemental tuition increase approved in May has cost the plan at least $3.4 million at a time when it is already struggling in a dismal investment climate.

And they warn that because the university system intends to impose a similar secondary tuition increase next year, new families enrolling in the savings plan might end up paying more than their fair share.

In a June 28 letter to the system's Board of Regents, the chairman of the Maryland Higher Education Investment Board said the regents' approval of an additional 1.5 percent increase in in-state tuition had delivered an unexpected blow to the Maryland Prepaid College Trust, which oversees more than 14,200 college savings accounts for state families.

"We got no notification," investment board Chairman Edwin S. Crawford said yesterday. "I'd hate to say we were blindsided, but that's what it was."

While the long-term health of the trust is not at risk, Crawford said, the episode has introduced a greater level of guesswork into the management of the plan.

More broadly, the episode has exposed a surprising lack of cooperation between the trust and the university system in promoting a savings plan that both sides agree is helping to make college more affordable.

"We do need to work more closely with them," regent David Nevins said yesterday. "We need to find a way to accommodate each other."

Under the plan, families make fixed payments - based on their children's age, current tuition rates and forecasts of tuition increases and investment returns - with the guarantee that the trust will cover their children's tuition once they reach college age.

In effect, it lets families pay future tuition at today's rates.

The plan has run into trouble because its managers based the savings contracts they signed last winter on the tuition rates the regents approved last August, which called for an increase of 4 percent in in-state tuition for the 2002-2003 school year at most public campuses.

Since the trust's founding in 1995, the regents had always held to tuition rates approved in late summer. But in May, the regents passed an additional 1.5 percent increase to offset a cut in state funding.

By then, it was too late for the managers of the savings plan to revise the roughly 4,000 contracts signed over the winter.

As a result, all of the new enrollees are making smaller payments than they should be, based on the latest tuition rates - leaving the trust to make up the difference when it comes time to pay for those families' tuition.

Crawford, himself a former regent, and trust Executive Director Joan Marshall said the shortfall does not imperil the program, which oversees a total savings commitment of $285 million. But it did cut into the plan's reserve as it is fighting to meet its goal of a 7.5 percent return on investments, they said.

"If we're not getting today's tuition right, then clearly there's a negative impact going forward," said Marshall. "The [trust] will really be feeling the impact when those 4,000 use their benefits."

To guard against a repeat of the current shortfall, the plan's managers say they will base their next round of contracts on tuition increases much higher than whatever the regents pass next month - even though that raises the possibility that families enrolling this year could pay too much, if the managers overestimate the final tuition rate.

"Parents are going to be paying higher rates because of the vagaries," Crawford said.

Interim Chancellor Joseph F. Vivona said university officials would meet among themselves and with savings plan managers to discuss the problems caused by the supplemental increase.

"We'll have to look at why that happened," he said.

But system officials made clear, at a regents meeting Wednesday, that the system will probably pass a two-phased tuition increase again this school year. Vivona recommended the regents increase tuition by only 4 percent next month to demonstrate their commitment to affordability - even while recognizing that in tight budget times, they will likely have to raise rates further in the spring, after the legislative session.

Regent Patricia Florestano wondered whether it wasn't better to approve a more realistic tuition increase next month because it is "extremely unlikely that this year's budget is going to be any better than last year's."

But Nevins agreed with Vivona, saying that raising tuition by more than 4 percent next month would "take [lawmakers] off the hook."

"We want the legislature to show their commitment" to colleges, he said.

Regents showed little concern about the effect another two-phased increase would have on the savings plan. One regent who requested anonymity said complaints by plan managers were a "smokescreen" to cover its poor investment returns and letting a program that involves a minority of the state's students dictate tuition would "clearly be an example of the tail wagging the dog."

Such lack of regard irks the plan's managers, who argue that the trust greatly benefits the university system by encouraging students to attend the system's colleges rather than out-of-state schools.

"If this continues - if they say, `We're going to charge 4 percent more,' but then grab the football out like Lucy and Charlie Brown and charge more - that's not doing any good," Crawford said.

"That's harming the fiscal integrity of the trust and the state."

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