Trouble for Those Using the Prepaid 529 Plan

As the budget crisis continues to have an effect on higher education across the board, parents in some states are worried that the funds they thought would be available to their children may in fact not be. Residents of Illinois are particularly upset as one of its 529 savings plans may not be honoring its promises when it comes to funds being owed to parents for higher education, according to an article posted in The New York Times. Prepaid 529 plans, which are part of a prepaid plan in several states, allow parents to pay tuition early at a locked in rate so that rises in tuition costs over the years will not affect them or their children. But, as some families are quickly learning, locking in their tuition for today’s prices isn’t exactly 100% reliable or guaranteed.

529 prepaid plans are generally supposed to work in one of two ways: as a savings plan, in which parents invest funds and other investments for higher education expenses without paying taxes on capital gains, or through prepaid savings, in which parents pay money (with premiums to cover expected tuition inflation) to lock in fees at that time for college at a later date, which can be refunded if students do not pursue a college education. However, what many parents do not realize is that states may differ in how or if they are guarantee those payments upfront. States such as Florida, Massachusetts, Mississippi, and Washington do guarantee getting involved to cover tuition inflation if obligations cannot be met because of under performance by the state’s own investments; however, states such as Illinois, Kentucky, Maryland, Michigan, Nevada, Pennsylvania, South Carolina, Virginia, and West Virginia do not guarantee such help.

Illinois’ 529 plan in particular stated that prepaid tuitions gave parents the peace of mind in knowing that their children’s tuition would be paid for, that the savings plan wasn’t dependent on stock market performance, that plans would be covered, and that contract holders who paid tuition early would receive the tuition and fee benefits regardless of fluctuations in the market.  That is what made Illinois resident David Mutnick, who paid for his daughter’s tuition in full, obviously upset about the news that he will likely need to pick up extra costs. With supporters of the program arguing that the prepaid plan is the best way to deal with tuition hikes and inflation, the numbers aren’t providing much assurance.

The plan has $1.35 billion in assets, with $1.69 billion in liabilities as of 2010, but it is believed that the shortfall can be made up if tuition rises less than 8% each year. In the wake of this news and the bad publicity the plan may get, experts were to be called in to review the plan and see whether the fund was in real danger. Whether or not this plan affects families and their children, or exactly how many people will be affected and in what states, is yet to be determined. However, one thing is for sure – always read the fine print and know what you’re signing up for.

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