Rising cost blamed for drop in Md.'s prepaid tuition plan

Enrollment period nets 3,400 accounts, a fall of nearly 23% over last year

Prepaid tuition plan nets nearly 23% fewer accounts

March 30, 2004|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

New enrollment in Maryland's prepaid college tuition plan dropped by nearly 23 percent this year, and a plan official blames the decline on the rising cost of tuition contracts.

For the four-month enrollment period that ended March 19, about 3,400 accounts were opened by those wanting to pay for tuition in advance to lock in prices. That's 1,000 fewer accounts than opened during last year's enrollment period and falls short of the plan's goal of adding 4,000 accounts during the sign-up period.

"Affordability is becoming an issue," said Joan E. Marshall, executive director of the College Savings Plans of Maryland, which administers the prepaid plan. "We have gone through two years of roughly 25 percent price increases."

The Maryland Prepaid College Trust allows people to prepay tuition and fees at state universities and colleges through a lump sum or installments. Options include buying one to five years at a four-year school or two years at a community college. The money can also be withdrawn later for use at private colleges or out-of-state schools.

Tuition contract prices are based on a variety of assumptions, including investment returns and tuition increases at Maryland schools. Steep tuition increases in the past two years have forced plan officials to revise tuition assumptions and pushed up the price of contracts.

For example, the lump-sum cost this year to prepay four years at a state university for a high school freshman was $32,563, a 27 percent increase over the year before.

Such increases aren't unique to Maryland. Other states have been bumping up contract prices in response to skyrocketing tuition.

Additionally, poor stock market returns in the past bear market have left many states with deficits in prepaid plans. Maryland's deficit shrunk in the latter half of last year as the market rebounded.

Even though the Maryland plan failed to meet its goal during open enrollment, Marshall said, the plan could still end up with 4,000 new accounts by the end of its fiscal year in June.

Families can buy contracts outside the enrollment period for a newborn or if they are already in the program and want to buy additional years of tuition.

So far, the plan has opened 468 accounts outside the normal sign-up period this fiscal year, compared with 317 accounts for the year before, she said.

Marshall said she is unaware of families shying away from the prepaid plan over deficit concerns.

At the end of the last fiscal year in June, Maryland's plan had an "actuarial deficit" of nearly $70 million, meaning based on projected value of assets and liabilities, the plan was short that amount in meeting future obligations.

Maryland's prepaid plan requires, if there's ever any shortfall, that the money be included in the governor's budget. Legislators can reject the request, and in the worst case, families could find themselves kicking in more money for college.

Plan officials have said the prepaid plan is expected to remain solvent at least through 2020.

Also, the financial health of the plan has been improving since summer along with the stock market, Marshall said.

During the first six months of the current fiscal year, the plan's deficit had dropped to $54.5 million. Over the same period, investments gained 10.64 percent. The plan's investment objective is to earn 7.5 percent annually.

Sen. Patrick J. Hogan, vice chairman of Maryland's Budget and Taxation Committee, said he is not worried about the deficit.

The Montgomery County Democrat said the cost of the contracts is probably the reason for the drop in enrollment, but he hopes families look at the prepaid plan's less expensive options.

Instead of buying four years at a university, for instance, they can buy two years of a community college, he said.

"They can always upgrade. The key is getting people in the habit of saving early," he said. "College isn't going to get any cheaper."

Under the prepaid plan this year, two years at a community college for a child who is now in kindergarten would cost $74 a month for 144 months. One year at a four-year university would cost $87 a month.

The plan has $230 million in assets and, after this enrollment period, about 25,000 accounts.

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