Alabama Prepaid Affordable College Tuition - State fears investors will pull money out of PACT

[exboyfil]

http://www.al.com/news/birminghamnews/statebriefs.ssf?/base/news/1236417339209360.xml&coll=2

Tuition fund has lost 46 % of its value in 1½ yearsSaturday, March 07, 2009 STAN DIELNews staff writer

The state on Friday urged parents and grandparents who bought into Alabama's troubled prepaid college tuition plan not to withdraw their investments, a move that could start a run and further drain it of funds.

Officials also said the state is not bound by an explicit guarantee in thousands of the program's early contracts promising participants that their tuition would be paid.

The Alabama Prepaid Affordable College Tuition trust fund has lost 46 percent of its value in a year and a half, including 20 percent during the recent stock market crash. The trust fund, with assets invested mostly in stocks, was worth nearly $900 million in 2007, and now is worth about $484 million.
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Many participants in the program were under the impression that their contracts guaranteed tuition would be paid in full if they made their payments. And contracts from the program's inception in 1990 through 1994 explicitly promise that would be the case.

"The P.A.C.T. Program guarantees payment of undergraduate Instate Tuition and Mandatory Fees on behalf of the Qualified Beneficiary," contracts obtained by The Birmingham News stated. The word "guarantee" was removed for later contracts.
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I reviewed the documents for this plan about two months ago looking for better options for my girl's 529s (I also did a posting here at the time). The plan was slightly underwater assuming 8.25% rate of return in September, 2007. I called the PACT folks at the time looking for the September 2008 documents, and they where somewhat testy (I wonder why).

If I had been one of the later contributors to the plan, I would have been pulling money out in January (long before the letters went out). The plan was over 75% in equities (necessary to achieve the 8.25% rate of return to meet growth in college tuitions). Early contributors are going to get hosed because it appears they will get no appreciation on their dollars at all (not only will it not meet tuition inflation, it won't even get the same return as burying a mason jar in your backyard after you add in liquidation fees etc).

I did not realize the earlier contracts included guarantees. That is going to make things interesting.

In January Kay Ivey was still talking up the fund when it was open for contributions. I got to wonder what the difference between her and Ken Lay is.

No doubt their is going to be a run on this fund. The two large state systems (Alabama and Auburn) have refused to help at all.

As far as I can tell the fund was mispromoted (to the point of fraud if you ask me). The first line of the fund should have read that the fund will attempt to match tuition growth and make funds available for tuition, but it will have to take market risk to achieve these results. In the event of a severe market downturn, it is doubtful that the fund will be able to meet its tuition obligations.

As an investor the plan makes absolutely no sense. You have no upside potential with the investment beyond what you can already accomplish on your own, and you have complete downside risk.

What also gets me is how lazy reporters are. As soon as the market was turning downward they should have been knocking on doors and asking these questions. It is a great story.

The problems with this plan does highlight the dilemna that middle class people have in saving for college. If the so called best and brightest mess up, then how can we expect middle class folks to do any better. These are good people who take the improvement of their children seriously. We need more families like these that want to step up to their obligations instead of waiting until FIFSA time to hold a tin cup out so that whatever social engineering that colleges do will be done and their kids will either get to go to college, mortgage their future, join the military, or look at other options.

The only form of aid available to middle class people are loans. I don't want aid, but I sure would like some guarantee that the dollars that are set aside will be able to meet tuition obligations in the future.

[Mojorabbit]

1. Interesting

I received a long email from Florida's program. We paid for a 4 year tuition for my niece. I guess I had better go back and read it carefully.

[Wapsie B]

2. Easier to build jails and prisons than help send more people to be educated elitists.

But since we've built all the new jails and prisons we need for awhile (certainly seems that way anyway) why not put the emphasis on things that will make society better, like college educations?

[exboyfil]

3. I am all for drug legalization and letting drug

offenders out of prison (but not those who committed crimes against other people).

Do you really think that the choice is between prison and college? What is actually happening is that we are creating a generation of debt slaves who still know they need to go to college, but their parents and them have been unable to save enough to defer a portion of the expense. I don't want my daughters to start out that way.

We have a group of responsible parents (like those in Alabama) that say, my kids are important and I am going to sacrifice today to improve their future. We want far more parents like this. Between tuition increases (in some cases fueled by the desire for more need based aid) and the devastation in any savings vehicle capable of keeping up with tuition inflation, you may quickly be reaching the point where hope is lost by individuals for the future. You are left with school administrators who decide "who can afford to pay more". They must love the power to social engineer this situation.

Since state colleges are subsidized so they can do anything that they want so long as the political will remains to continue the subsidization. If those individuals that bear the brunt of the tax burden for the subsidization no longer feel that their families are getting a fair shake, then I wonder what will happen then.

[Wapsie B]

4. Yes at its most basic level it's between funding things like prisons

as opposed to funding to colleges, social workers and the mental healthcare system for example. I agree with you. There is a kind of social engineering going on to limit the number of people who have access to higher education. Conservatives have spoken out about this for years, about how there aren't enough professional level jobs out there that require at least a BA/BS and how to them it seems pointless to churn out masses of educated people only to be underemployed later after graduation. So to limit the numbers of people who have a college education is a conservative's dream come true. They're getting their wish.

I hope things change so your kids and mine can achieve their goals in life, education being one of them.

[exboyfil]

5. Well to contrast higher education rates to Social Democracies

like Germany you see that Germany tries to practice more of a meritocracy. Their spend on higher education as a percentage of GDP is much less than the U.S., their per capita access to higher education is less, and they practice streaming at a much earlier age. While the University level may be free or nearly free, only the early annointed get a shot at it in general.

As far as I am concerned, I would love such a system (my girls are high achieving with high grades and high test scores - they also have parents in their corner that will fight for every possible advantage in terms of access).

What is happening in the German system (and would become much more obvious in the U.S. with our more heterogenous mix of people) is that resentment is created in the non-professional class because they feel their kids are not getting a fair shake. In addition deep resentment is created with the recent immigrant population because they feel they are getting even less of a fair shake.

Since I am still the only member of my immediate family ever to go to college, I have something of a pragmatic view on college. I see it primarily as an opportunity to receive the credentials to open doors and give the skills necessary to perform a professional job. As a side benefit it should teach critical thinking skills and an understanding of our government, rights, duties, and responsibilities (but that should already mostly have been done at home and at the High School level anyway).

I really don't think you can characterize conservatives as ones wanting to limit college. Most conservatives I know would vote for the meritocracy model realizing that resources ultimately are limited. If they were not, then why are not more governments that practice a more liberal/progressive philosophy sending much more students to higher education on a per capita basis. They recogonize the limitation on resources and respond accordingly as well. Their approach may be different, but they are no more out to limit students than conservatives are.

Everyone wanting to go into Engineering in California would like to send their kids to UC Berkeley. They get a degree as valuable as a MIT, Cal Tech, or Stanford for 1/6th the price or even less. How do we decide who gets to go?

Some schools, and I see this as a dangerous trend, have created two tier tuition situations in which those who have the opportunity to earn more both as an intern and as a working professional afterward are asked to pay more than those majoring in professions without this advantage. Obviously, salary cannot be viewed as a surrogate for societal contribution, but the free market does signal certain professions as being more valuable than others. In other words you cannot say that we need more engineers to fuel economic growth, while, at the same time, telling those very same engineering students - sorry you have to dig deeper into your pocket to pay more tuition just because you can (either today or more likely in the future).

As far as I can tell the financial aid offices practice social engineering in a variety of ways. First they look for the best racial mix that they can achieve. Next they move to geographical considerations (ie if you are from a high performing school district then you better be on top otherwise forget it). In any event it is a lottery for how much you are going to ultimately pay for higher education. Makes planning a real problem.

If parents pay the EFC expected without savings, then they better be ready to cut past the bone and probably mortgage their retirement in the process.

My point is that it is not in society's interest to demoralize parents trying to save for their children's college. My kid's are going to do fine (assuming we survive in any sort of current form).