Enrollment in prepaid-college-tuition programs has soared since the financial crisis began last fall.
Enrollment in prepaid-college-tuition programs has soared since the financial crisis began last fall.
Indeed, interest among consumers and states in prepaid programs, where families can lock in future tuition fees by paying current rates, is very much on the rise, thanks to the recession and an innovative new program in Texas.
"Prepaid plans are back. They're here to stay, and there will be more," Bill Raynor, vice president, Section 529 institutional sales, and client service manager for New York-based OppenheimerFunds Private Investments Inc., told attendees at a 529 industry conference in Miami last month.
New enrollment in the Maryland Prepaid College Trust plan rose 26% last month, when 678 students were enrolled, compared with 538 students in January 2008. And for the last six months of 2008, the Pennsylvania Guaranteed Savings Plan also saw a 26% increase in new accounts, rising to 3,495 accounts opened from July through December, compared with 2,773 for the last six months of 2007.
Total contracts for all state prepaid plans (Massachusetts has a prepaid plan, but it isn't a 529 plan) rose 6% to 1.9 million contracts through September, from 1.8 million a year earlier, according to industry reports.
In addition, a consortium of 275 private colleges and universities participate in the Independent 529 prepaid-tuition plan, which is managed by TIAA-CREF in New York. January contributions to the plan rose 9% to $2.26 million, compared with $2.07 million for January 2008.
Currently, 12 states have prepaid 529 plans, and another prepaid plan may soon be opened in Oregon thanks to recently proposed legislation. Interest is also percolating in a number of other states, including California, according to industry sources.
Economic turbulence appears to be fueling consumer interest in prepaid plans, state officials said.
"There's been a lot of volatility in investment markets, and people like the comfort of being able to lock in a payment for future tuition benefits," said Joan Marshall, executive director of the College Savings Plans of Maryland in Baltimore.
Only a year ago, prepaid plans were considered a faltering segment of the 529 industry. A half-dozen states had closed their prepaid plans since 2001, primarily because states feared carrying the burden of a funding gap between money paid into the plans and the actual cost of tuition when students entered college.
But now "there's a buzz about prepaid plans," said Andrea Feirstein, an independent consultant to state 529 programs and managing member of AKF Consulting LLC in New York.
The Texas Tuition Promise Fund, which focuses on tuition and fees for state schools, has emerged as the center of the industry's attention.
Launched last September, the Austin-based plan shifts the burden of unfunded liabilities to the universities. By contrast, the state had been responsible for any shortfalls in its old prepaid plan, the Texas Tomorrow Fund, which was closed to new enrollment in 2003.
"If tuition inflation is greater than the rate of return on the plans' funds, the university is obligated to make up the difference," said Kevin Dieters, director of the education opportunities and investment division in the Texas Office of the Comptroller of Public Accounts in Austin.
Indeed, the primary appeal of the Texas plan is that "the risk lies with the schools. There is no more state guarantee," Mr. Raynor said.
"Texas is clearly a model. There has to be risk sharing or [prepaid plans] won't work," said Jacqueline Williams, executive director of the Ohio Tuition Trust Authority in Columbus, which closed its prepaid plan in 2004.
Since the Texas plan's launch in September, more than 4,800 students have been enrolled, and approximately $100 million worth of contracts have been sold.
The plan's fund is managed by OppenheimerFunds.
Flexibility has been key to the plan's popularity so far, according to Mr. Dieters. Parents can choose to buy "units" to prepay tuition and fees at a later date at different price ranges for different types of state schools, and parents can choose to pay in a lump sum, in installments or on a pay-as-you-go basis, he said.
Despite the interest in the Texas plan, few in the industry think that there will be an immediate rush to open prepaid plans. "Prepaid plans are not a pan-acea, but they are one of a series of options for 529 plans that must be considered," Ms. Williams said.
"They're not a slam-dunk," said Ms. Feirstein, who advised Texas on its prepaid plan. She and other industry executives noted that prepaid plans pay for tuition and fees only, while contributions to non-prepaid 529 plans can be used to pay for all qualified educational expenses, including room, board and books.
What's more, students may end up not going to a school covered by the prepaid plan in which their parents enrolled them. While parents can get their money back, in addition to the returns the money may have earned, the amount is often far short of the tuition costs they end up facing at current prices.
E-mail Charles Paikert at cpaikert@investmentnews.com.
