Should Parents Worry About Prepaid College Savings Plans?
March 12, 2009
There is a group of parents in America right now who made an outstanding investment decision for their children's college savings. Due to good planning (or good fortune) they purchased prepaid college savings plans. These plans allow parents to pay for future college tuition at today's prices. The plans administered by either states or the universities allow parents to protect themselves against the relentless increase in college tuition. With the average 529 college savings plan down over 30% from less than one year ago, these parents have made a very wise decision. In fact, by paying for college in today's dollars they are protected from both inflation and from stock market losses. Kudos to these parents.
But do these parents need to be concerned that the prepaid tuition promises will be kept? There have already been reports that many states are facing severe deficits in their ability to meet their prepaid tuition obligations. Even worse, in at least one state legislators are openly debating borrowing the money currently held in prepaid college savings plans which would leave the funds severely underfunded. We know that the stock market has decimated the value of these plans. And we know that college tuition is always increasing. What we don't know is how the states and universities are going to make up this difference. Hoping that the stock market magically shoots back up to 14,000 to increase the value of assets in the plans just doesn't quite cut it.
Now is the time for parents to check out exactly who is administering their prepaid college savings plans. Determine what their guarantee is to you and how that can be enforced. If you live in state where there is an open debate regarding tapping into prepaid funds held by the state, contact your state representatives and let them know that this is a sacred cow which should be protected. You made a great decision - now you need to protect yourself.