A number of states offer “guaranteed” or “prepaid” tuition plans that generally allow participants to prepurchase tuition credits for a child at today’s price that can be used when the child enrolls in college. If the money is invested at a rate at least as high as the rate of tuition increases, the state should have enough to cover beneficiaries’ tuition.

But tuition increases have outstripped many plans’ investment returns and, in some cases, left investors holding the bag. Investors in the Alabama Prepaid Affordable College Tuition Plan have been left to pick up the gap between returns on the plan’s investments and tuition increases. The same fate may await participants in the Florida Prepaid Tuition Plan. The College Illinois! 529 Prepaid Tuition Plan has used accounting gimmicks to mask its shortfall and aggressive investment in hedge funds, real estate and private equity to make up lost ground. If Illinois is unable to realize its unrealistic projected returns, its participants may end up like Alabama’s. And this is a program that held itself out as offering investors “peace of mind.” (Its executive director is a Rod Blagojevich appointee/contributor whose broker-dealer blew up in 2005.) Savingforcollege.com lists 14 plans that are not backed by the full faith and credit of the state, yet they include names such as “Pennsylvania Guaranteed 529 Saving Plan” and “Guaranteed Education Tuition” (Washington State).

The names of others include the term “prepaid.” However, in some cases participants are not actually buying tuition credits at today’s prices, but at an inflated price. For example, the Florida Prepaid Tuition Plan charges $274.56 to a kindergartner for a credit that currently costs only $102.33.

Notwithstanding these issues, the College Savings Plans Network, a state-run organization, claims “that prepaid plans across the country are stable and continue to be a conservative, reliable strategy for saving for college.” A CSPN video (see below) on prepaid plans includes a generalized statement about the need to evaluate the state backing of a plan, but no disclosure of problems in Alabama, Illinois or Florida. The video claims that “every state that has ever offered a prepaid tuition plan, whether the plan is open or closed today, has continued to pay the promised tuition benefits on behalf of all participants,” which does not appear to be consistent with the situation in Alabama.

What rights do investors have when the government engages in misleading sales practices and false advertising?  What authority do the SEC and other federal regulators have to crack down on these abuses? Is legislation in order?

Problems in Illinois:

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CSPN video:

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