Plan for the future

January 29, 2004

LEGISLATORS WHO are agog over the $70 million actuarial shortfall in Maryland's prepaid college tuition plan should remember that they hold levers affecting the program's future health. They share these controls with the university officials who set tuition rates.

Plan managers attribute roughly 85 percent of the shortfall to the last two years' spikes in Maryland's public college tuition, increases that were prompted by a hefty decrease in state support for higher education. The slump in the market only piled on the hurt.

Now the plan managers say they're doing what they must: In addition to adjusting their investments and trying to better predict the market and tuition changes, they're passing on the cost of the shortfall over time to new families who sign up for the legislation-backed guarantee that locks in today's tuition rates for tomorrow's students.

It's easy to argue that these additional costs help price some families out of a chance to use the investment vehicle. But as college costs rise, so goes the cost of enrolling in the plan. So what most can change the outlook for the prepaid plan would be a commitment on the part of state leaders - legislators and university officials - to public policy that stabilizes state support for the colleges and makes tuition increases more predictable.

But there are some additional steps that should be contemplated:

Trustees of the prepaid college plan and state officials need to honestly assess whether in future years they should guarantee paying some amount less than full tuition. At least one version of this that has been considered would push some of the burden on the colleges in the event of tuition rising, by asking them to absorb the increase, in effect discounting tuition for prepaid-plan students. Naturally, the colleges would oppose this. But there may be additional ways to structure such a plan change so that it remains a good investment for families while preserving the program's future.

The governor and legislature also could consider the ripple effect of their budgetary decisions on the prepaid plan, and create a cushion if they are going to make significant cuts sure to prompt an increase in tuition rates; program managers are making their own plans to create a reserve as soon as possible.

The prepaid plan is said to be solvent through 2020. Today's shortfall should remind state officials not to wait until the program can't pay out on its promise, or even until the next recession, but to do all they can today to shore it up.

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