You've been a diligent parent, socking money into a 529 Plan for your kids' educations. You've been a conservative investor, avoiding the market and putting the cash in a state sponsored prepaid tuition vehicle. You know the deal: for a certain number of dollars, you receive one year's tuition at State U. – or an equivalent amount of money to be used wherever your child chooses to attend college. It doesn't depend on a robust stock market; it doesn't rely on savvy investment skills. You chose it because it was safe.
But was it? I've been looking at these state-sponsored prepaid plans for a few years now, and I've always worried that they're not a whole lot more secure than the market itself. They're not typically backed by the state treasury or guaranteed in any fashion. I wondered: what would happen if the fund didn't grow at the same rate of tuition? The answer: Houston, we have a problem. This is from today's Birmingham News:
"The trust fund backing Alabama's prepaid college tuition program has lost more than 45 percent of its value in a year and a half — including 20 percent lost to the recent stock market collapse — and program managers are scrambling to find ways to keep paying students' tuition…. Asked whether the program might simply fail, [Alabama Commission on Higher Education Chairman, Greory] Fitch on Monday said: 'That's a difficult question.'
"The Trust Fund and investments under PACT [Prepaid Affordable College Tuition] are not bank deposits, and are not debt obligations of, or insured or guaranteed by the FDIC, the State, the Board, the Treasurer, the PACT Program, or any other state or federal governmental agency," a disclosure document says. "None of these entities or persons has any legal or moral obligation to ensure the ultimate payout with the respect to the purchase of a PACT Contract."
One word: ugly.