Seizing on an idea that has become popular in several states, a Minnesota education-finance corporation plans to offer what it calls the first national prepaid-tuition plan.
Under the plan offered by the hemar Corporation of St. Paul, parents may prepay one to four years of college tuition based on current prices and the number of years before their child enters a participating higher-education institution.
The plan has been endorsed by 25 university presidents.
Other prepayment plans have been introduced at individual colleges or by some states, such as Michigan and Florida. These plans, however, restrict participants’ college choices to one school or to institutions within a state.
The only other national tuition-savings plan was created by the College Savings Bank, based in Princeton, N.J. Under it, parents can invest as little as $1,000 in a certificate of deposit that pays an interest rate that rises along with increases in college costs.
Hemar officials say a major bene4fit of their plan is that it allows a student who chooses to attend an institution other than the one designated to transfer the prepaid tuition to the second participating school. If the student is unable to attend college, the prepaid tuition may be transferred to a sibling or first cousin or refunded without interest. And if the student decided to attend a nonparticipating school the prepayment would be refunded without interest.
A number of institutions are said to be interested in the plan. Among them are those whose presidents are serving on the advisory board for hemar. These include Brandeis University, the University of Kansas, George Washington University, and the University of Wisconsin system.
The plan still must be approved by the Securities and Exchange Commission and have its tax status assessed by the Internal Revenue Service. On a statewide plan in Michigan, state officials said that the irs has determined that the investment returns on the trust fund are taxable, and that beneficiaries will be liable for income taxes on the difference between their prepayments and the eventual tuition.
Hemar officials expect a favorable ruling from the sec that the prepayment contract is not an investment. And they do not foresee problems from the irs, they say, because the prepayments will be made directly to colleges, which have tax-free status, instead of to a trust as in the Michigan plan.
Questions remain, however, on whether the plan will work for institutions and for parents.
“My assessment is this is not the magic bullet we have been waiting for,” said Richard E. Anderson, director of the Forum for College Financing at Columbia University. Mr. Anderson has put forth a prepayment concept of his own, which involves a nonprofit fund where money would be invested collectively for all participating institutions.
The hemar plan “may work for a lot of students,” he said. “But they are using bonds. As soon as you use bonds, you are very likely to fall short of the funds required to meet increasing college costs."--mw
