Florida’s Prepaid Tuition Plan Lives On Borrowed Time

Florida’s prepaid tuition plan, like those in other states, is probably living on borrowed time. That time may soon run out, if Gov. Rick Scott gives the state’s flagship universities the tuition-setting freedom they want.

A bill awaiting Scott’s signature would eliminate tuition increase caps for public universities that meet 11 out of 14 benchmarks in areas such as selectivity, graduation rates, research and fundraising. Scott has played his cards close to the vest on whether he will approve or veto the legislation, which is, unsurprisingly, unpopular with students across the Sunshine State.

So far, only the University of Florida and Florida State University would meet the standards and be permitted to charge “market rate tuition.” The state’s nine other schools, however, could gradually work their way toward qualification. Currently, public universities in Florida can raise tuition no more than 15 percent each year.

The universities say the increased financial freedom would serve as a much-needed reward for excellence and allow them to become more competitive. Meanwhile, Stanley Tate, a Miami businessman credited with starting Florida Prepaid, the state’s prepaid 529 plan, has said the bill “will end the program.”

Prepaid 529 plans allow parents to buy college credits for their children in advance, generally at prices that are somewhat higher than present rates but not as high as costs are expected to be once the kids reach college age. The plan sponsor invests that money, hoping to generate a high enough return to cover tuition increases. Theoretically, plan participants don’t have to worry about what happens to financial markets or tuition prices, since they are already assured a certain number of credits for their money. This is in contrast to college savings 529 plans, where participants themselves take on investment risks and benefit from market gains.

As I have written before, however, prepaid plans are not as risk-free as they appear. While all but one of the prepaid 529 plans on the market are sponsored by states, not every state with a plan has backed it with the full faith and credit of its treasury. Of the 18 states that offer prepaid 529s, just Florida, Massachusetts, Mississippi, Washington and Texas offer an unconditional guarantee. As a result, many participants are unknowingly gambling on the hope that, if their plan ends up without enough cash, the state government will voluntarily offer up the necessary funds. Given many states’ overall financial difficulties, that’s not a very attractive bet. Even in states that include solid guarantees, future legislation could change the plans’ features and benefits, or restrict new contributions.

While plans would ideally fund themselves, there is a real chance that many prepaid 529 programs will find themselves at the mercy of legislators as a result of higher than expected tuition increases and worse than expected investment performance. More than half of state plans are currently underfunded, according to data from the College Savings Plans Network, a nonprofit association that advocates 529 plans.

The problem is that there is no easy way to project how tuition costs will increase relative to investment gains. The Florida bill highlights the issue.

Because Florida is one of the handful of states that fully guarantee their prepaid 529 plans, the state will be on the hook if the bill is enacted and University of Florida and Florida State University raise tuition dramatically. This is why the legislation could lead to the end of the prepaid program for future participants. With no way of foreseeing how tuition rates at top schools may change in the future, the state will likely think twice before signing up any new beneficiaries. It would be following a trend if it decided against allowing them. Since 2000, Alabama, Colorado, Kentucky, Ohio, South Carolina, Tennessee and West Virginia have all closed the door to new participants in their prepaid programs

The truth is, whether the variable in question is legislative action or market forces, there is no such thing as a risk-free investment. Even when current Florida Prepaid contracts were issued, while the tuition increase caps were firmly in place, the trajectory of tuition increases was never entirely foreseeable, since there was always the chance that the caps would be altered.

I have never used or recommended a prepaid 529 plan. There’s nothing wrong with taking financial risks. But there is something wrong with pretending risks don’t exist where they do.

About Larry M. Elkin 534 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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1 Comment on Florida’s Prepaid Tuition Plan Lives On Borrowed Time

  1. Like you said, the State guarantees the Florida plan, so for those participants, isn’t the risk eliminated for them? They aren’t pretending.

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