The appeal of a prepaid tuition program is that parents start saving up for college early, no matter what universities technically end up charging when their children finally start. This was the Tennessee BEST college savings account program. Basically families could buy college credits at current in-state tuition rates and then redeem them when their children actually got to college, when the price would be much higher.

Except sometimes it doesn’t work out so well. According to a piece by Richard Locker in the (Memphis) Commercial Appeal:

The state of Tennessee on Monday ended the sale of prepaid college tuition units in its Baccalaureate Education System Trust [BEST] program because the program’s investment earnings have lagged far behind dramatic tuition increases in recent years.

The tuition prepay program’s 9,043 current enrollees… will continue to receive their tuition payouts but will no longer be able to purchase new units. The prepay program will no longer be open to new enrollees.

The Tennessee General Assembly created the BEST system in 1996 to help Tennessee families save for college through several tax-exempt college investment accounts.

The trouble is that tuition kept rising and in recent years, with the collapse of the economy, the investment accounts simply didn’t yield enough. As Tennessee Treasurer David Lillard awkwardly explained when he canceled the program last week:

I believe the prepaid tuition program was started with good intentions. However, over the last four years, the General Assembly has placed about $40 million in taxpayer dollars into the program to compensate for the disparity between tuition increases and investment returns. I do not believe it would be wise to potentially put future taxpayer dollars at risk by expanding the program.

When the state legislature created the program it assumed that tuition would rise about 6 percent a year and the investments would yield about 7.5 percent a year.

In fact tuition has increased about 9 percent a year. On average, investments have only earned 2.5 percent annually. The state was making up the difference.

Tennessee officials are now encouraging families to enroll in another, less generous program, where the state simply matches contributions up to $50.

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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