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Economic Crisis and the End of Prepaid College Tuition Plans

Just what we needed, more complications springing up from the steady rise of college tuition costs! This time, the problem is with a form of 529 investment plan called the pre-paid college tuition plan. The idea was that parents could put money into a trust fund, a little at a time over many years (like a 401K for students rather than retirement), and through the magic of savings and investment dividends could have their child's college tuition paid off in full before they even entered freshman year. Unfortunately, thanks to a gap created by rising tuition and falling stock market value, that full-paid tuition is no longer such a sure thing.

The rising cost of college and plunging stock market have combined to create a disparity between what some of the 18 states' prepaid tuition plans have on the books and what they're supposed to pay. The worst case is in Alabama, where the sour economy has sliced off nearly half of the fund's assets, and state officials are telling parents the full cost of college isn't a sure thing.

The board overseeing the plan there is scrambling after assets lost 48 percent of their value since September 2007, and they currently have only about half of what they need to pay what families are expecting. Unless the market shifts quickly or the plan receives an infusion of cash, it would run out of money after nine more years of paying full tuition. The plan could also reduce payments to families.

Eighteen states offer this program, but not all are feeling the effects of a downturned economy to the same degree. Seven states are still backing their plans despite tighter times, but others are reeling from losses and lack of coverage--Alabama, Tennessee, South Carolina, West Virginia, and Washington being among the worst-off. According to Tennessee's assistant Treasurer Steve Curry, the problem could be easily reversed through either state budget money or a dramatic upturn in the stock market. So far, these have yet to happen. In the meantime, student loans loom on the horizon for many students and parents who thought for years that tuition was in the bag.

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