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Prepaid Tuition A Future Flunk-Out?

By Albert B. Crenshaw
Sunday, November 14, 2004; Page F01

From Virginia to Ohio to Texas and beyond, a growing number of public universities are seeking to redefine their relationships with their state governments and the taxpayers who historically have supplied billions of dollars to support the universities.

The development is raising potential new problems for already troubled prepaid tuition programs, which have been set up in many states to allow families to lock in today's tuitions for when their kids reach college.

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The revisions are driven by the collision between steadily rising operating costs at the colleges and increasingly strapped legislatures that have found university support an easy target for budget cuts.

As many of these schools see it, state assistance has declined so much over the years that it is no longer worth the restrictions that accompany it, including curbs on tuition increases.

The schools' approaches differ somewhat, but in most cases freedom to raise tuition, especially on at least some in-state students, seems to be a key goal. For example, Miami University in Ohio has adopted a private-school-like pricing model: It nominally charges a high tuition, then offsets it in many cases with extensive discounting in the form of student aid.

Miami and others say this model gives them the flexibility they need to compete with private colleges. Miami officials said it has allowed them to boost aid for moderate-income in-state students who were being priced out by increases that had occurred under the old model.

In other cases, schools are boosting tuition and using the extra money to sweeten aid packages for top applicants who would otherwise attend private or out-of-state institutions.

These approaches are controversial for a number of reasons, and they are making it very difficult for their states' prepaid tuition programs to continue.

These programs typically allow a family to buy a contract that promises to pay all or a specific share of a child's tuition at a state college in the future. The programs assume that their money managers can invest the family's contract payments and use the growing balance to keep up with tuition. But the programs have been struggling in recent years as tuition has suddenly shot ahead and investment returns have sagged.

Most prepaid programs are grounded in the assumption that in-state tuition will be at least somewhat restrained and will be the same for all in-state students. Conversion to a "soak the rich, help the poor" pricing model for in-state kids would create new headaches for these programs because their contractual promise could put them on the hook for the full "sticker price."

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