Prepaid tuition plan faces $70 million deficit

Md. legislators worry that rising costs make program too expensive

January 28, 2004|By Ivan Penn and Eileen Ambrose | Ivan Penn and Eileen Ambrose,SUN STAFF

Maryland's prepaid college tuition plan, hobbled by skyrocketing college costs and weak investment returns, faces a $70 million deficit and legislators angry that the plan is becoming too expensive for many families.

The price tags for Maryland's prepaid tuition plans have jumped as much as 27 percent during the last enrollment period. It was the second year in a row of such steep increases.

Such plans, introduced with fanfare in the 1990s in Maryland and many other states, offer parents a way to lock in the promise of a college education for their children with a lump sum or installment payments. The programs promise to cover the rising costs of college tuition at a reasonable price.

But those promises appear vulnerable. Maryland legislators worried aloud at a briefing in Annapolis yesterday that the state's prepaid tuition plan might fall short of fulfilling its financial promises, leaving the state to make up the shortfall. In the worst case, parents in the plan might have to pay more.

Maryland's concerns are shared elsewhere, as states juggle tight budgets and weigh the rising cost of their promises to parents. Last year, Ohio, Texas, Kentucky and West Virginia suspended new enrollment in their prepaid plans. Colorado shut down its plan the year before that.

In each of the past two years, Maryland's Prepaid College Trust significantly increased the cost to enroll in its plan. Those increases have left experts worried that parents might be priced out the prepaid plan.

"We're putting in government guarantees for people who can afford college and not for people who can't," Sen. J. Lowell Stoltzfus, an Eastern Shore Republican and Senate minority leader, said during the briefing. "I think this whole thing is a house of cards. Someone on this committee called it a pyramid scheme, and I think it is."

Sen. Patrick J. Hogan, a Montgomery County Democrat, asked, "When are we going to start seeing people say, `I can't afford this'?"

"We're already seeing that," said Joan E. Marshall, executive director of the College Savings Plans of Maryland.

Marshall said the plans' officials are urging people to consider smaller investments of one year's college expenses to start, and add to their investment later. "They don't have to lock in for four years up front," Marshall told the senators.

"The vast majority of prepaid tuition plans have been showing a deficit," said Joseph Hurley, founder of Savingforcollege.com and a national expert on college savings plans. "It's something to be concerned about."

The investment returns of plans across the nation have been severely hurt in the recent bear market that erased fat surpluses created during the 1990s stock surge. But experts place most of the blame for today's multimillion-dollar deficits on recent tuition increases that have far outpaced inflation and forced plans to raise the costs of the prepaid contracts.

These deficits potentially put states in another bind. Many states, including Maryland, offer guarantees to parents buying contracts.

In Maryland's case, if the plan has a shortfall, the governor must make up that money in the budget. Legislators have the option to reject the governor's request. If that were to happen, it's possible that the plan would require parents to pay more.

Possible, but unlikely, said Edwin S. Crawford, the former chairman of Maryland's college savings plan board, in an interview yesterday. "Maryland has never not honored an obligation," Crawford said, adding that legislators won't want to disappoint parents. "There would be quite an outcry."

Besides, Crawford pointed out, the Maryland plan's deficit is based on investment returns as of June 30. Since then, the market has rebounded, erasing some of the deficit.

Maryland's deficit is an "actuarial deficit," meaning that based on the projected value of assets and liabilities, the plan is $70 million short in meeting future obligations.

Plan officials, updating legislators in the Senate Budget and Taxation Committee yesterday in Annapolis, said that the program is expected to remain solvent through 2020. They acknowledged, though, that the projected deficit forced them for the second year to drastically increase enrollment costs.

A lump-sum payment into the savings plan for a first-grader costs $31,550 to cover the cost for four years of college, an increase of about $13,000 over two years ago. Monthly payments over five years for the same plan would cost $632 a month.

Legislators worried that families were being priced out of the prepaid tuition market.

State Treasurer Nancy K. Kopp, chairwoman of the savings plan board, said at the briefing that the plan cannot continue to handle the kinds of drastic tuition increases that the public schools have endured over the past couple of years. The state raised tuition 20 percent for this school year, about $500 a semester for some families.

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