Rising Tuition Costs Weigh Heavily on Prepaid Plans

The Illinois Student Assistance Commission, which administers the college savings plan for more than 46,000 beneficiaries, sold just 438 new contracts in the 2013-14 sales season that ended April 30.

The program had a little over 72 percent of the assets needed to meet long-term future payments as of June 30, according to the most recent actuarial report on College Illinois’ health. College Illinois wouldn’t have enough money to cover its obligations in 13 years if it sold just 1,000 contracts annually, the report said. Presumably, if this year’s sales pace continues, the program would fall short sooner than that.

“There’s going to be no state bailout,” said Illinois House Minority Leader Jim Durkin, R-Western Springs.

College Illinois Contract Sales Plummet, Crain’s Chicago Business, May 19 2014

What do you get when you combine tuition inflation over 8% from 1992-2012 (which is 5.5% HIGHER than general inflation), a 8% stock market return, a 6% bond market return, and a tuition program that promises to cover the cost of college? You end up with a prepaid tuition plan that does not have enough money to fund its obligations.

And as the article states, the plan today is dependent on additional sales to keep the plan afloat. I don’t know about you, but that is not something I’d like to hang my hat on. According to the 2013 Actuarial Soundness Valuation Report, the plan will run out of money in ten years if the program is only able to sell 500 new contracts each year. Last year’s number was 438.

What Does This Mean To You

So what if you purchased a pre-paid contract and the plan does not have money to fulfill its end of the deal? College Illinois’ FAQ section states the following:

Although the taxing power of the State is not pledged to make payments under a program contract, under the Illinois law that set up the program, the Governor of Illinois is required to request funding from the Illinois legislature sufficient to pay all program benefits during any year there is a current funding shortfall.

In the event the Commission, with the concurrence of the Governor, determines the program to be financially infeasible, the Commission may discontinue, prospectively, the operation of the program. Any beneficiary who has been accepted by and is enrolled or will within five years enroll at an eligible college shall be entitled to exercise the complete benefits specified in the College Illinois! prepaid tuition contract. All other contract holders shall receive an appropriate refund of all contributions and accrued interest up to the time that the program is discontinued.

To learn more about the benefits and responsibilities of owning a College Illinois! Prepaid Tuition Program contract, read our Disclosure Statement and Master Agreement.

Simply stated, you are guaranteed to receive your plan contributions plus some undetermined amount of interest. If your child is already accepted/enrolled in college, you don’t need to worry. The plan will pay for their tuition.

Based on the financial problems of the State of Illinois, I would not count on a financial bailout from general tax dollars. The House Minority Leader even said so. I’m hopeful that if the plan does begin to run out of money, the State will able to broker some kind of deal with the Universities. After all, whose fault is it that costs have increased 8% over the last 20 years?

So What Is A Parent To Do?

  • Discuss your overall plan to pay for college, retirement, and that small beachfront property with your trusted advisor
  • If you own a prepaid tuition plan, be sure to review the plan documents and financial reports in detail to understand your risk
  • Have a plan B for if the plan does run out of money and the state is not willing or able to pick up the tab

A part of your plan B may be funding a 529 plan with different investment options that can be adjusted based on your child’s age and risk tolerance. The Illinois 529 investment plan vehicle is BrightStart. If the College Illinois prepaid plan has enough money for tuition – fantastic! You can still use the BrightStart funds to pay for non-tuition qualified costs like room and board and other required expenses. If your child chooses a more expensive state school or goes out-of-state, your plan B funds could be used to pay for the additional cost.

Bottom line is until the tuition inflation problem is addressed, parents need to be even more diligent and aware of their funds dedicated to paying for college.

 

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