Alabama’s Prepaid Affordable College Tuition (PACT) plan was supposed to work like this: Alabama families would save money for college under a structured plan. That structured plan would exert pressure on Alabama state colleges to keep tuition down. The state would supposedly cover tuition no matter how much it expanded. The theory is that it enough people signed up for tuition plans, those would be the only money, really, available for tuition. So the structured plan would exert pressure on Alabama state colleges to keep tuition down.

Well it hasn’t quite worked out that way. It turned out PACT wasn’t really a pact at all so much as an ill-thought political gimmick. From the Associated Press comes news that Alabama can’t afford its tuition program:

Assistant Treasurer Daria Story and program administrator Brenda Emfinger said it takes $70 million to $80 million annually for tuition. After the fall semester of 2011, the program will be down to about $350 million, which is the amount needed to refund the money that participants paid into the program.

The trouble was the tuition kept rising, rising so fast that it threatens to utterly overwhelm PACT. Apparently Alabama needs to inject $236 million into the system just to keep it alive. Both the Alabama House and Senate have passed bills to do this, but they can’t agree on whether or not the plan needs a tuition cap built in.

According to an article by Jane Kim at the Wall Street Journal, this has implications for the rest of the country:

Across the nation, college prepaid plans are operating in the red, putting their promises to investors… in jeopardy. For now, the states still are paying tuition as they agreed. But the fine print in some state contracts gives them some wiggle room to pay out less than the promised amounts.

Investors had flocked to prepaid plans in recent years as they witnessed skyrocketing tuition and huge market losses on their monthly statements for more-popular 529 college savings plans, which often invest in mutual funds.

But market losses also hammered prepaid plans—just less visibly than conventional 529 savings plans. Prepaid plans hold roughly $15 billion in assets, and their investments are still recovering from recent stock-market declines. At the same time, schools are jacking up tuition to cover state budget shortfalls.

The trouble is that tuition savings plans operate just like everything else financial. It’s just another account used to pay for college. When the economy goes sour all investments suffer. That means there’s less money from the state and also less money from investments. Tuition kept climbing and the tuition plans couldn’t raise enough money to keep paying for the increases.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer