Pre-paid tuition cost to rise

By MICHAEL MARTZ
MEDIA GENERAL NEWS SERVICE
Published: November 6, 2008

Highlights:
- The cost of a contract to lock in four years of tuition at a state-supported college or university for the parents of a kindergartner will increase from $39,944 last year to $44,060, or 10.3 percent, starting Dec. 1

- The ongoing economic crisis is to blame, officials say

- If you already own a pre-paid tuition contract, your cost won’t change

Virginia parents will pay more for a state guarantee of college tuition for their children.

The price of a pre-paid tuition contract will rise 10.3 percent on Dec. 1 when the state offers parents a new chance at enrolling in a program that guards against rising tuition rates and falling investments.

Those forces—a stock market that has hammered investments and tuition increases at state colleges and universities that have outpaced expectations—have prompted the Virginia College Savings Plan to raise prices for pre-paid contracts to bolster the program’s diminished reserve fund.

The cost of a lump-sum contract to lock in four years of tuition at a state-supported college or university for the parents of a kindergartner will increase from $39,944 last year to $44,060 during the new enrollment period, which runs from Dec. 1 to Feb. 28. In comparison, the state raised prices 7 percent last year and 8 percent two years ago.

The 10.3 percent increase this year is in part to shore up the program’s reserve, which fell below its 10 percent standard to 9.2 percent.

“That’s how we took into account the current situation,“ said Mary G. Morris, executive director of the savings plan and a former state treasurer.

The savings plan projects that the future costs of educating children with pre-paid contracts could exceed the program’s ability to pay them. The plan’s long-term projections show a $51.8 million shortfall.

That doesn’t mean the program is short of cash to pay its current obligations or that the state would have to advance money from the budget to cover costs, but it does represent a sharp reversal from a year ago, when projections showed a $122 million surplus.

“We have no concern in meeting our obligations right now,“ said Chief Financial Officer Gary Ometer, who said that more than 97 percent of the program’s predicted future costs are fully funded.

State Auditor of Public Accounts Walter J. Kucharski sees no threat to the program’s solvency but is concerned that what once was considered a good deal for parents worried about paying for their children’s education may fall out of reach for many.

“If the market doesn’t recover . . . you’re going to end up pricing your long-term contracts so nobody can afford to buy them,“ he said.

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The economic crisis has put a big dent in many people’s savings for their children’s college education, but state officials say they’re offering parents an attractive shelter from market turmoil and tuition increases.

If someone already owns a pre-paid contract, Ometer said, “You don’t have to worry about it.“ Existing contracts are unaffected.

Virginia’s pre-paid education program was the first in the country created under a provision of the federal tax code known as 529. Virginia operates the largest set of the 529 plans in the country, giving opportunities for people to shelter savings for college from taxes on investment earnings.

Two of the state’s plans—the Virginia Education Savings Trust and CollegeAmerica—were named among the top five 529 plans in the country by Morningstar Inc. this year.

All but one of the state’s 529 plans relies on earnings from investments in the stock market, including the pre-paid education program administered by the state and its investment advisers. In the year that ended June 30, the pre-paid program lost 4.6 percent on its investments instead of the 7 percent gain it had projected a year earlier.

The market since has gotten much worse. The pre-paid program’s investments fell an additional 8.6 percent in the quarter that ended Sept. 30. Its portfolios include two international equity funds that have led the pack during the past five years but had fallen in value almost 27 percent in the first nine months of this year. And that’s before October’s market meltdown.

Still, state officials aren’t making changes in the way they allocate investments among different types of equity and income funds. “We don’t see any cause for alarm,“ Morris said.

Investors in the state’s other 529 plans—VEST, CollegeAmerica and a new insured-banking plan called CollegeWealth—have been more active than usual this year in shifting money into what Morris called “more conservative or less volatile” funds offered by the plans.

“We’ve seen some increase, but it hasn’t been dramatic,“ she said.

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One drawback of the 529 plans is a federal rule that restricts investors from making more than one investment change in a year. Virginia officials can’t do anything about the restriction, but they are waiving the application fees for current investors to open new accounts if they want to shelter additional money in less risky funds.

“Clearly this has been a challenging environment,“ Morris said.

The challenge is especially important for the pre-paid program, which manages about $1.8 billion in assets. Virginia’s budget always includes an appropriation to guarantee payment of tuition under the pre-paid contracts, but it’s never been used.

“The taxpayers are the ultimate guarantor,“ Kucharski said. “As long as the program continues, there is always going to be some risk we’re going to have to shell out money.“

Program officials say they take a conservative approach in projecting the return on investments and in annual increases in tuition, which have driven up prices dramatically in the past five years.

Prices for pre-paid contracts rose 25 percent in 2003, when tuition went up in the middle of the academic year. The state raised the prices 46 percent in 2005, reflecting two years with combined tuition increases of more than 32 percent.

In 2004, the state didn’t even open the program for new contracts. This year, officials think they might see a surge in contracts during the 90-day enrollment period that begins Dec. 1.

“I would anticipate increased participation,“ Morris said. “Time will tell.“