529 Prepaid College Savings Plans Going Broke in Many States

Many prepaid 529 college savings plans are going broke, caught between a crashed stock market and huge inflation in college tuition costs. The result is that many of these plans do not have the assets to pay the tuition of the contributors.

The NY Times did an interesting article on this. According to it:

"Between them, the 18 state funds serve nearly 1.6 million families and hold $23.8 billion in assets, ranging from Tennessee’s small $80 million fund serving 9,700 families to Florida’s massive $8.7 billion fund that serves about 850,000 families."

"All of the funds but Florida’s and Colorado’s now have an actuarial deficit, meaning they do not have enough money to pay all of their future college tuition obligations. Most are only about 80 percent to 90 percent funded. But many are worse off, like the Illinois fund, which is about 75 percent funded, and South Carolina and Alabama’s funds, which are both about 66 percent funded."

Not all of these plans are guaranteed, meaning that several of them could ask families for more money. That most likely won't happen so taxpayers in the state will be on the hook to make up the difference. And that difference could be substantial. 18 state funds serve nearly 1.6 million families and hold $23.8 billion in assets. Many states are not changing the rules so that the university system itself bears the risk if the funds drop in value. But the university systems are really just wards of the state, so it's taking money from one post versus the other.

To me, this highlights the absurdity of the college education bubble. I wrote in Dec 08 that college tuition has far oustripped inflation over the past 30 years. High college tuition makes it hard for 529 prepaid tuition plans to be viable. If tuition increases at a double digit rate every year, then the plans must invest in riskier investments in order to keep pace. That means that when there is a market downturn, these plans will suffer greater losses, as they have done.

College tuition is a bit like medical care. People are willing to pay almost any price to give their child an advantage. But as this article states, the rising costs of college makes it an investment that may never pay back.

So, what are the solutions? Students and parents could refuse to attend a university that is charging $50,000 plus per year. But that won't happen until college education becomes so expensive that students are going to have to ask themselves if it makes sense to take on $1,000,000 in debt.

Until then, parents and investors will contort themselves in an even more desperate attempt to balance the books and find the cash to educate their kids.