School Choice & Charters

Lawmakers Eyeing Prepaid-Tuition Plans Anew

By Kerry A. White — April 23, 1997 4 min read

When her husband died suddenly five years ago, Sally Gilliland, a Bradenton, Fla., mother of two, says she spent no time worrying about covering her college-bound sons’ education on a nurse’s salary.

That’s because, in 1988, the Gillilands were among the first families to enroll in Florida’s Prepaid College Program, a “pay now, learn later” approach to college financing that allows parents to lock in their children’s future college-tuition bills at current prices by paying into a state-run investment program. State financiers invest the early tuition payments, and proceeds from those investments cover subsequent tuition increases at state colleges and universities.

Ms. Gilliland says her family’s purchase of college “contracts” through the Florida program covered most education expenses for her sons, Pat, now 20, and Sean, 22, who today attend the University of Florida in Gainesville.

“I had peace of mind knowing that college was paid for, no matter what,” she said in an interview last week. “Tuition--well, everything--had increased, and it would have been hard to afford two college educations as a single parent. The program saved me a lot of sleepless nights.”

Critics have charged that prepaid-tuition programs often fail to benefit students who need the most financial help. Nevertheless, in answer to public anxiety over the soaring costs of higher education, lawmakers across the country have adopted or are weighing tax-exempt tuition-savings programs like Florida’s, allowing parents to start paying their children’s tuition bills before the youngsters are reading, writing, or even talking.

Such plans got their start in the late 1980s. Fourteen states have prepaid-tuition programs in place, and a host of others, including California, Illinois, New York and Connecticut, are now weighing plans of their own. Most programs allow the benefits to be transferred to nonparticipating institutions in or out of state.

The Way of the Future

More than 500,000 students are now enrolled in prepaid-college programs, and experts expect that, before long, every state will offer a version.

“The handwriting is on the wall,” said Brian Fitzgerald, the staff director of the Advisory Committee on Student Financial Assistance, a Washington-based organization that advises Congress on higher education funding trends. “There’s a tremendous hysteria over colleges’ rising costs, and [these programs] are one way a state can respond.”

Although more young people than ever are attending college, state funding for higher education has not risen with demand. According to Mr. Fitzgerald, the ever-increasing costs of Medicaid and prisons have put tremendous pressure on state budgets, and, as a result, funding for public colleges has been shrinking.

Schools have recouped some of their losses by increasing tuition. For the past 15 years, the tuition at public colleges--where more than two-thirds of all college students are enrolled--has risen nearly three times as fast as household incomes, according to a U.S. General Accounting Office report released last fall.

According to the U.S. Department of Education, the average college costs for the 1995-1996 school year--including tuition, fees, room, and board--were $7,013 for public colleges and $17,613 for private colleges.

Meanwhile, student financial-aid--federal, state and institutional grants and scholarships--have ebbed, forcing more students to take out loans to pay for school.

Not Just a Luxury

Michigan created the first state tuition-prepayment program in 1986, and before long a half-dozen states had created or were considering similar plans.

Nationwide legislative efforts stalled, however, while a Michigan case that centered on whether and how such prepayment programs would be taxed moved through the courts.

Michigan sued the Internal Revenue Service for tax-exempt status for its plan in 1994, arguing that its prepaid-tuition program, the Michigan Education Trust, was “an integral part of the state,” and that traditionally the federal government has not taxed the direct income of states. In November 1994, a federal appeals court ruled in Michigan’s favor on the tax issue. States have been creating similar programs at a fast pace since.

With $1.6 billion in assets, Florida runs the largest program in the nation. Last year, the Sunshine State sold 40,000 tuition contracts and 10,000 dormitory contracts (covering on-campus room and board), for a total of 426,000 contracts since the program began.

“A college education does not have to be a luxury,” program Chairman Stanley G. Tate writes in a 1997 annual report. “The legislature created the program to support its policy of providing affordable post-secondary access to as many Floridians as possible.”

Supporters of Florida’s program say the plan renewed enthusiasm for college.

“Knowing that college awaits them I think helps motivate parents and kids to work hard and focus on school,” Ms. Gilliland, the Bradenton mother, said.

But prepaid-tuition programs are not without detractors.

A 1995 GAO study of such programs examined several well-known concerns, including fears that the plans subsidize the education of mostly well-off students while doing little to help families with the greatest need.

But supporters say that not all government programs have to help the poor and that increased saving by middle-class families means more financial aid will be available for lower-income students.

Moreover, the GAO study showed that several states have programs flexible enough to encourage even families with little or no disposable income to invest. Florida, for example, offers a long-term community college contract for as little as $11 a month.

Michael A. Olivas, a law professor at the University of Houston and an expert on prepaid-tuition programs, said that the best of these programs--the most flexible and expertly administered--"can service and create a public good.”

“Anything that gets families to focus on college is a good thing,” he said.

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