Market Slide Snags Alabama Tuition Program

Many parents plan ahead, prepaying for college when their children are young.

But now, some who have already socked away money are wondering if it'll be there when it's time to pay tuition.

Nineteen states run prepaid tuition programs, and most encouraged new parents to pay current prices for a future college education.

But with the economy struggling, several state-run prepaid tuition programs are under financial distress, facing skyrocketing tuition and major stock market losses.

Alabama has one of the largest shortfalls, but other states with deficits in their prepaid tuition funds include Tennessee, South Carolina, West Virginia and Washington.

Alabama's Losses

Prepaid tuition programs gained popularity in the past 20 years as Americans tried to keep up with the rising cost of college. They are one of two types of tax-free earning plans under IRS section 529. The other is a college "savings" plan, in which individuals select their own investment strategy.

Alabama's Prepaid Affordable College Tuition Program, known as PACT, spent years recruiting new investors.

But now, the Alabama fund has lost half its value since 2007. That's more than $450 million. Consequently, the program doesn't have enough money to cover its future obligations. Earlier this year, state Treasurer Kay Ivey warned 48,000 families of the mounting losses.

"Nobody could foresee it coming at such a rate," Ivey said. "It works fine as long as the economy is working."

Ivey says that when the economy hit the skids last year, the Alabama program was already struggling with tuition increases and a higher-than-usual number of students ready to go to college.

News of the shortfall was a shock for investors like Richard Huckaby, a veterinarian from Lanett, Ala. Since his children were very young, Huckaby has been paying a few hundred dollars a month into the prepaid tuition fund. In all, he's paid more than $23,000.

"My kids' college education depends on it," Huckaby said. "My daughter starts this fall. My son will start in 2012, and my expectations are that his education — as far as tuition — will be paid for. That's what we bought into."

There's a dispute over whether the plan actually guaranteed a college education, or whether parents bought in at their own risk.

"They didn't say that the PACT wasn't guaranteed," Huckaby said. "It was proclaimed to be a risk-free investment for your children."

Lobbying For Change

At least two families have sued. But Huckaby co-founded SaveAlabamaPact.com to lobby Montgomery lawmakers for a fix.

State Sen. Roger Bedford co-sponsored a bill to use state tax dollars to keep the program afloat.

"Lawyers can debate whether or not it's a legal contract or not," Bedford said. "That's not the point. It's a state prepaid college tuition program. I think we have a moral obligation."

Bedford and others say Alabama's fund was invested too heavily in risky stocks. His bill would move the program from the state treasurer's office to the state retirement system.

But Ivey defends her management of the fund.

"The investment managers are doing well," she said, noting that they've invested in good U.S. and international companies and also have holdings in bonds. But Ivey says they have to invest more in stocks than in bonds because they have to "grow so fast to outrun the ever-increasing cost of tuition."

Losses To 529 College Savings Plans

Alabama House Majority Leader Ken Guin, a Democrat, says people who opted to invest in 529 college savings plans have also lost money.

Joseph Hurley, the founder of Savingforcollege.com, says that depending on investment income to keep up with tuition costs isn't working.

"Unfortunately, these programs were initially designed to help families that didn't want to have to worry about the stock market, that didn't want to have to worry about future tuition increases," he said. "They simply wanted to prepay tuition now and not worry at all about it. So this is now coming back to haunt some of those families."

State Guarantees

Six states already back the funds if they lose money. Others are looking to charge more or cap tuition.

Some states, including Alabama, have stopped accepting new investors altogether as they figure out how they'll pay for the thousands of students who are already expecting a fully paid college education.

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