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Prepaid 529 College Tuition Plans At Risk.

Posted on | December 11, 2009 |

One of the painful lessons of 2008 was that 529 college savings plans can lose money. Sometimes, a lot of money.

529 plans, like 401(k) retirement plans are simple constructs for holding your savings; in the case of 401(k), it’s savings for retirement, while a 529 holds savings for college costs. But if you happen to invest those savings in aggressive stock funds, then you could be in for a bumpy ride. Like it, or hate it that’s part of the reality of these plans.

But now some college 529 prepaid tuition plans are now at risk.

Prepaid 529 plans are supposed to avoid the roller coaster-like ups and downs of a traditional 529 plan because they allow parents to buy tuition credits at a price slightly above the value of the tuition today, and cash them in at “face value” when the child goes to college. Think of it as a savings bond, as opposed to investing in the stock market.

The problem is that the state typically assumes the risk for the prepaid plans, and more and more states are realizing they’ve spent themselves into bankruptcy and never saved for the time when the economic boom would go bust.

Alabama’s Prepaid Affordable College Tuition plan may collapse, and other states are limiting enrollment or drastically increasing the cost of the tuition credits. While no one has yet lost money or benefits in these prepaid plans, there is a risk that many may not have been aware of previously.

According to the College Savings Plans Network:

Thirteen states offer prepaid tuition plans that are open for new enrollment, either currently or seasonally. Another two, Kentucky and West Virginia, have been closed to new enrollment for several years. The Colorado and New Mexico plans have been permanently shut down to any enrollment and will close when the last beneficiary finishes school.

Many who have paid into these accounts and purchased tuition credits believe that the program is guaranteed and that their money will be available at the time their child is enrolled in a school of higher learning. Unfortunately, this is not true.

According to The New York Times:

Of the 18 prepaid plans, 16 are underfunded, meaning they don’t have enough money to pay future tuition obligations. And only a handful of plans are fully guaranteed by the state.

All of this adds up to fiscal irresponsibility and broken promises on the part of state government officials. The lesson here is clear: nothing comes without risk, and parents need to do their due diligence and weigh these risks against those of other college saving methods.

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Comments

One Response to “Prepaid 529 College Tuition Plans At Risk.”

  1. Matched Betting
    December 12th, 2009 @ 12:42 pm

    Educational tuition fees have always been way to high for what the student actually recieves.

    For the prices they charge we should be pumping out geniuses by now

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