Prepaid-tuition programs once were the no-brainers of the college-savings industry. By investing in the state-sponsored plans, you could lock in today's rates to cover tomorrow's pricier college bills.

But with tuition costs soaring, more plans are being forced to impose fees, temporarily halt enrollments and, in some cases, sharply boost "today's rates."

"There are only 19 states that now offer prepaid plans, and many have enrollments on hold because the governing bodies realized that they couldn't charge enough now to keep the program fiscally sound," says Diana Cantor, chairman of the College Savings Plans Network and the executive director of Virginia's Prepaid Education Plan. "Any new contract would be more of an obligation than they could cover."

State programs vary, but generally prepaid-tuition plans allow parents and grandparents to buy education "units" -- contracts that will pay tuition and fees for a full four-year degree or a portion of those costs. The cost for the units is based on what in-state colleges and universities currently charge for tuition. In return, plan participants can use those units to pay for future costs down the road, when college costs are expected to be significantly higher.

For example, with Virginia's Prepaid Education Plan, the state guarantees it will cover all in-state college tuition and fees for plan enrollees -- no matter what the cost. If your child chooses to attend school out of state, you'll get your initial investment back plus a "reasonable rate of return," which, as of March 31, was a paltry 1.25%. "It's like buying a variable-rate college savings bond," Ms. Cantor says.

The states take the payments they receive and aim for a rate of return that will allow them to cover future tuition costs. And there's the rub. The weak economy has impinged private endowments and state-school funding, and colleges and universities are increasing tuition to close the gap. At the same time, the market has hurt the plans' returns. The upshot: The prepaid-tuition programs have to cover much higher tuition and fees -- with much less money -- than they anticipated.

What went wrong? Most of the prepaid-tuition plans were created in the last 10 years, at a time when the economy and the stock market were booming, says Bob Crompton, vice president of Actuarial Resources Corp. of Alpharetta, Ga., which recently documented a $12 million shortfall in the South Carolina Tuition Prepayment Program.

"In some cases, it appears some of the contract prices were set at a fairly aggressive basis, based on the economic environment at the time -- meaning that the prices were less than self-supporting," he says.

South Carolina's Senior Assistant State Treasurer Paige Parsons says plan administrators currently are evaluating how much they will increase prices for the next enrollment period, which begins in October.

Shoring Up the Plans

To bridge the growing gap between projections and reality, some prepaid plans are raising the contract premiums they charge, tacking on new account fees and, in some cases, halting enrollments in the plans to a forestall a future fiscal crisis. Meanwhile, for some parents already in plans that aren't guaranteed to cover all tuition costs, the amount they receive for their investment may not be enough to cover their children's college bills when the time comes.

In Colorado, where the CollegeInvest plan was never guaranteed to cover all future college costs, plan administrators stopped accepting new participants in November. And, it announced that unless state lawmakers agreed to financially back up the plan so that it can cover full tuition costs in the future, plan participants will be limited to a 5.5% annual return on their investment, says State Treasurer Mike Coffman. Given the recent stretch of double-digit annual tuition increases, that figure will leave many parents well short of their college-savings goals.

Many parents who joined the plan and didn't read the fine print mistakenly believed there was a guarantee that all future college costs would be paid, Mr. Coffman says. "There never was an explicit guarantee that the state would step in in the event that the plan wasn't able to meet its defined-benefit goal," he says. "I've been a critic of the program for a long time because the program was created by the general assembly, and its marketing pitch was 'Buy tomorrow's tuition with today's dollars.' The state has a moral obligation to provide some kind of guarantee."

COST CONSCIOUS

For the 2002-2003 school year, the average cost for undergrad tuition, fees, room and board at a four-year public college or university was $9,663. For a private four-year school, that tab more than doubles to $25,052. The chart below compares college costs today with projected freshman-year college costs for the parent of a newborn.

College 2002-2003 2021-2022*
Two-Year Public $1,735 $21,664
Two-Year Private 15,217 190,009
Four-Year Public 9,663 120,658
Four-Year Private 25,052 312,815

*Projected costs for tuition, fees, room and board.

Source: The College Board; Finaid.org



Other plans that do guarantee they'll cover future college costs have been jacking up the premiums they charge for their contracts. The Ohio Tuition Trust Authority recently boosted the annual premium on its four-year-plan unit to $89 from $69 a year ago. A unit will buy you 1% of what the plan charges for a year's worth of in-state tuition and fees.

That means you're paying $8,900 to guarantee a full year of in-state tuition and fees. That's far more than today's proverbial rates: The current payout value for people in the plan is $5,979 a year.

The plan also began repricing what it charges for the units every quarter, instead of annually, to better keep up with fast-changing tuition costs.

"They're trying to make up for a deficit these programs have now and to help build a reserve to cushion future conditions right now. That's causing the price to go up," says Joseph F. Hurley, chief executive of Savingforcollege.com LLC, a Pittsford, New York, company that provides information, as well as consulting services, on 529 college-savings plans.

Though it hasn't raised the prices for its plan as much as other states, the Pennsylvania Tuition Account Program did recently tack on a $25 annual account fee. Still, Mr. Hurley thinks the comparatively low prices for the plan makes it the best deal available in prepaid plans right now.

What to Do?

If you're already in a prepaid plan and have a long savings horizon, there isn't too much reason to worry about your plan's stability. There's time for the plans to make up for the recent shortfalls, Mr. Hurley says. "Parents who are already in those plans for a while are probably feeling good, since they've locked in their tuition increases as tuition costs soar," he says. "And if you're new to the plans, the current shortfalls shouldn't worry you too much, since there's still time for the plans to rebound."

But if you've been in the plan for only a few years and expect to begin cashing in on your investment soon, find out where you stand if the plan isn't guaranteed. Check with your plan administrator to see if there have been changes in the payout you can expect to receive from your investment, then square that figure with current projections of tuition and fees in the year your child is expected to enter college. If there's a shortfall, you should start boosting your monthly savings now, or if that isn't financially possible, check into parent or student loans.


If the recent problems have turned you off to prepaid programs altogether, one alternative is the new "Independent 529 plan," a program that allows parents to invest money now to pay for future college expenses at discounted rates. Though called a 529 plan, the federal program more closely mirrors state prepaid tuition plans, with the key exception being that college tuition and fees are completely covered whether the student attends school in or out of state. To learn more about the benefits and drawbacks of Independent 529s, read this article.

Savingforcollege.com's Mr. Hurley also suggests parents looking for a conservative investment comparable to prepaid plans check out CollegeSure CDs, a federally insured certificate of deposit offered by College Savings Bank in Princeton, N.J. The CDs behave somewhat like prepaid tuition plans in that they guarantee a certain rate of return.

Ms. Cantor of the Virginia College Savings Plan notes that some prepaid plans allow investors the flexibility to move cash between a prepaid plan and a 529 plan, where investments are more self-directed. "What we advise people in Virginia is it may be prudent to lock into something now, but if you feel you can get a better deal down the road in the markets you can move that money back into the markets," she says.