Illinois’s Struggling College Savings Plan

Illinois announced that it’s ending its prepaid tuition program. It will not be selling new plans, at least for awhile. It looks like those college savings plans, whereby parents can plan for college expenses by purchasing tuition credits at current rates to be used in the future, aren’t working out so well.

According to an article by Steve Daniels in Crain’s Chicago Business:

The state agency running the College Illinois prepaid tuition program has halted sales of new contracts; meanwhile, a new financial study concludes that the $1.1-billion fund backing the college savings plan remains in a substantial hole.

The new report, commissioned by the Illinois Student Assistance Commission, finds that, as of March 31, the fund was 30 percent short of what it needed to meet its long-term obligations. That was about the same shortfall found on June 30, 2010, the date of the previous financial-health study. But the latest review incorporates lower, and probably more realistic, forecasts on investment returns and sales of new contracts, assuming they resume.

The way prepaid tuition is supposed to work is that families buy contracts for tuition credits. The interest earned on the money they put into the plan is supposed to cover the increase in the cost of college. In this way a plan purchased when a child is born is supposed to generate enough money to cover tuition when the child reaches college age.

But it’s not. The problem in Illinois, as elsewhere, is that the cost of college rose higher, and a lot faster, than interest on the investment accumulated. This is a function of two things. In the first place, the market in the last few years has performed poorly, so the investment accounts didn’t generate the money planned. The other difficulty is that, in part also due to the economy, state universities are getting less money from their legislatures. This causes them to hike tuition; the cost of college is also increasingly more than the investment accounts predicted.

According to the article, Illinois has the “greatest deficit of any prepaid [college] tuition program in the U.S.”

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