Trouble times for prepaid tuition plans
By Lucy Lazarony • Bankrate.com

Talk about a one-two punch.

An under-performing stock market and skyrocketing college tuition prices have knocked many prepaid college tuition programs into the red.

"The combination of these two things have just wreaked havoc on these plans," says Timothy Hayes, executive director of the National Institute of Certified College Planners. "The ones that have been the most aggressive in their assumptions are in the most trouble."

These budget shortfalls have resulted in some steep price increases for parents looking to invest in state prepaid tuition plans.

"For new enrollees the cost is significantly more than it had been in the past and I think people are taken aback by that," says Gary Pressley, president of Academic Funding Group in St. Paul, Minn.

A prepaid tuition plan lets you purchase units of tuition for any state college or university at today's prices. A semester's worth of prepaid tuition purchased at today's prices would pay for a semester's worth of tuition at any future date.

To make this happen a state must be able to invest the cash and get a return equal to the increase of future college tuition prices. Double-digit increases in tuition at state universities make that awfully tough to pull off, especially in today's stock market. It's no wonder so many prepaid tuition plans are in the red and being forced to raise prices.

The steep price increases mean some prepaid tuition deals aren't nearly the deals they used to be.

And there's another important thing to worry about. If troubled times persist, what's keeping a state from backing out of a prepaid tuition program altogether? It depends.

"Some states back up prepaid tuition plans with full faith and credit guarantees. Other states don't," says Joe Hurley founder of Savingforcollege.com, and author of The Best Way to Save for College: A Complete Guide to 529 Plans.

If you've got money in a prepaid tuition plan or are thinking about joining one, be sure to take a close look at the guarantee promised by the state.

Some states offer no guarantees. Others states promise to consider appropriations to make up the shortfall in a prepaid tuition plan.

"They should check into what, if any, guarantee the state is making in terms of prepaid tuition plans," says John Gannon director of the NASD office of investor education. "The best thing to do is keep yourself informed."

And keep your fingers crossed.