Market Slide Snags Alabama Tuition Program Alabama's prepaid tuition program is in trouble. It's designed to let parents pay while children are young, so that when they reach college age, tuition is covered. But Alabama invested much of the money in stocks, and managers now say they lack the resources to pay tuition for 48,000 students.
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Market Slide Snags Alabama Tuition Program

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Market Slide Snags Alabama Tuition Program

Market Slide Snags Alabama Tuition Program

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MICHELE NORRIS, host:

Now, to the topic of college tuition. Some parents planned ahead and prepaid for college when their children were very young. Now, they're wondering if the tuition will be there when the time comes.

As NPR's Debbie Elliott reports, some states' prepaid tuition programs are not in good financial health.

DEBBIE ELLIOTT: Prepaid tuition programs gained popularity in the last 20 years, as Americans tried to keep up with the rising cost of college. They are one of two kinds of tax-free earning plans under IRS Section 529. The other is a college savings plan where individuals select their own investment strategy.

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

(Soundbite of prepaid tuition ad)

Unidentified Woman: Today's babies are tomorrow's college graduates. Start saving now...

ELLIOTT: Alabama's Prepaid Affordable College Tuition Program, known as PACT, spent years recruiting new investors with ads like this one.

(Soundbite of prepaid tuition ad)

Unidentified Woman: (Singing) Make a PACT, a college pact for life.

ELLIOTT: But is it a pact for life? Alabama's fund lost half its value since 2007, more than $450 million. Meaning the program does not have enough money to cover its future obligations.

Earlier this year, State Treasurer Kay Ivey warned 48,000 families of the mounting losses.

Ms. KAY IVEY (State Treasurer, Alabama): Nobody could foresee it coming at such a rate. It works fine as long as the economy is working.

ELLIOTT: Ivey says 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, Alabama. 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 put in more than $23,000.

Dt. RICHARD HUCKABY (Co-founder, Savealabamapact.com): My kids' college education depends on it. 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.

(Soundbite of paper)

Let's just flip through here quickly.

ELLIOTT: He pulls out a brochure from 1996.

Dr. HUCKABY: Let's see. Why choose PACT? Flexibility assurance and the potential to save thousands of dollars...

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

Dr. HUCKABY: They didn't say that the PACT wasn't guaranteed. It was proclaimed as being a risk-free investment for your children.

ELLIOTT: At least two Alabama families have sued. But Huckaby co-founded savealabamapact.com to lobby Montgomery for a fix.

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

State Senator ROGER BEDFORD (Democrat, Alabama): Lawyers can debate whether or not it's actually a legal contract or not. That's not the point. It's a state prepaid tuition program. I think we have a moral obligation.

ELLIOTT: Bedford and others say Alabama's fund was invested too heavily in risky stocks. His bill would move the program from the treasurer to the state retirement system. Ivey defends her management of the fund.

Ms. IVEY: I'm earning double digits over the total life of the program, it's been 8.8 percent. The investment managers are doing well. They invested in mighty fine U.S. firms and some international firms within fixed income. Yeah, but we have to be in more equity than in fixed income, 'cause we got to grow so fast to outrun the ever-increasing cost of tuition.

ELLIOTT: Ivey wanted a cash infusion from the legislature. But that didn't happen in this year of budget deficits and teacher layoffs.

Democratic House majority leader Ken Guin says people who opted to invest in 529 college savings plans have also lost money.

State Representative KEN GUIN (Majority Leader, Alabama House of Representatives; Democrat, Alabama): We talk about taking money, particularly it would probably come from education. You have people say, well, why aren't you going to bail me out? Well, that's the issue. That the tough political issue to face.

ELLIOTT: 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.

Mr. JOSEPH HURLEY (Founder, Savingforcollege.com): The model that these programs are based on has some serious flaws.

ELLIOTT: Joseph Hurley is the founder of savingforcollege.com. He says depending on investment income to keep up with tuition costs isn't working.

Mr. HURLEY: 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. They just simply wanted to prepay the tuition now and then not worry at all about it. So this is kind of coming back to haunt some of those families.

ELLIOTT: Six states already back the funds if they lose money. Others are looking to charge more or cap tuition. Seven, including Alabama, have stopped accepting new investors altogether, as they figure out how they're going to pay for the thousands of students who are already expecting a fully-paid college education.

Debbie Elliott, NPR News.

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