Parents hoping to dodge the effects of an alarming succession of tuition increases at Maryland's colleges and universities by buying a prepaid tuition plan got bad news this week.
Costs of prepaid tuition contracts jumped as much as 27 percent, the Maryland Prepaid College Trust announced. It was the second steep increase in as many years.
The plan allows people to lock in the cost of tuition and fees at a Maryland school by paying in advance, in a lump sum or in installments. The money also can be withdrawn for use at private colleges or schools outside the state.
The hefty cost increases have plan administrators concerned.
The question is whether sales of the tuition contracts will continue rising or level off because "the cost of higher education is becoming so prohibitively expensive," said Ed Crawford, chairman of the College Savings Plans of Maryland board, which oversees the plan.
The cost of four years at public university in Maryland is projected to cost $102,150 in 18 years.
Last year, enrollment exceeded expectations by a few hundred new accounts despite increases of as much as 30 percent contract prices. New accounts reached 4,300, bringing the total to about 18,800.
"We had more families look at the prepaid trust because of the concern over tuition rising," said Joan Marshall, executive director of the Maryland savings plans. "I certainly hope that trend will continue."
As happened last year, trust officials blamed this year's increase on hefty tuition increases. State school tuition rose by up to 20 percent this fall. They noted that once parents join the prepaid plan, tuition costs are locked in.
"If your child is younger and you expect tuition to increase rapidly, it could still make good sense," said Joseph Hurley, chief executive of Savingforcollege.com and an expert on prepaid plans.
"Generally, if your child is older, the increased prices will hit you harder. You don't have as much time for [future] high tuition to justify that investment," Hurley noted.
Maryland isn't alone in raising the price of tuition contracts.
"Programs are either shutting the door to new enrollments or are increasing their prices," said Hurley. "And price increases have been substantial in just about every case."
A contract's price is based on a combination of factors, most important the age of the child, anticipated tuition and investment returns.
This year, the lump-sum cost of a contract for two years' tuition at a community college for an infant is $6,440, or about 18.5 percent more than last year. The lump-sum cost for four years at a university for a high school freshman is $32,563, a 27 percent increase.
The next enrollment period runs from Nov. 17 through March 19.
Money grows in the plan tax-deferred, and Maryland residents can deduct up to $2,500 of annual contributions on their state income tax returns. Tax-free withdrawals end in 2011, unless Congress extends the tax break.
Prepaid tuition plans across the country have struggled with growing deficits fueled by rising tuition and poor investment returns. Ohio recently became the latest state - joining Texas, Kentucky and West Virginia - to suspend new enrollment in its prepaid plan. Colorado shut down its plan last year.
These state-sponsored plans also have new competition from a consortium of private colleges that began a prepaid plan in September. In that plan, individuals can buy tuition certificates that can be used at one of more than 220 private colleges nationwide, provided the student is accepted at the school.
Maryland's prepaid plan began in 1998, about two years before a bear market in stocks began. The plan's surplus quickly evaporated.
For the fiscal year that ended June 30, the actuarial deficit grew to nearly $70 million, more than double the $30.5 million deficit of the year before. An actuarial deficit means that, based on projected value of assets and liabilities, the plan would be short $70 million in meeting its future obligations.
Crawford said Maryland's growing actuarial deficit also results from rising tuition.
Last year, the plan's investment portfolio gained $10.3 million, or 7.51 percent, after posting a 7.8 percent loss the year before. The total portfolio was worth $155.8 million at the end of June, which includes investment gains and payments from new contracts. Overall, the plan's total assets rose to $327.46 million, up from $237.8 million.
Thomas Lowman, chief actuary at Bolton Partners, a pension and benefits consulting firm in Baltimore, said tuition increases caused the deficit to grow this year. "It's getting worse," he said. "What they really need to do is have a plan on how to get out of the problem. They aren't going to do it from investments."