Alabama’s Prepaid Tuition Plan May Go Belly Up Sooner Than Expected March 22, 2010
Ian Welham tells how Alabama’s prepaid tuition plan is running out of funds and may end by fall 2011
For years Alabama has offered parents or grandparents an efficient way to invest in their children’s college education, through a prepaid college tuition plan. This plan allowed families to pay a fixed amount during a child’s younger years and in return receive four years of paid tuition at an Alabama state university. The plan invested mainly in stocks, a sound strategy for years.
That is, until the stock market plummeted in 2008.
Severe losses spelled the plan’s demise. At first, it was speculated that this program might reach its end in 2014; but recent numbers are much more grim and now point to an ending point in fall 2011. The date has been pushed up because State law dictates that when the program can no longer pay tuition, it can end the program but must refund the participants their fixed payment with a small amount of accrued interest. It is projected that in the fall of 2011, the program will be down to roughly $350 million dollars, just enough money to pay the refunds.
While Alabama’s crisis is presently the one getting media attention, I doubt this will be an isolated incident. As states’ fiscal woes mount (a handful of states are teetering on the brink of bankruptcy), I suspect we’ll be seeing more and more stories similar to Alabama’s. The lessons here are many. The two most obvious are:
- When it comes to something as important as paying for college, do you really want to put your child’s future (not to mention your hard-earned money) in the hands of state bureaucrats?
- When it comes to something as important as paying for college, can you really afford market risk? When you absolutely, positively HAVE to have that money available, are you comfortable rolling the dice alongside the gamblers on Wall Street?
There are much safer and more reliable options.
