Wednesday, October 1, 2003

Prepaid college tuition less inviting in Ohio, Kentucky

By Karen Gutierrez
The Cincinnati Enquirer

Saving for college has gotten a little tougher in Ohio and Kentucky.

Both states recently made changes to their prepaid tuition programs, which allow parents to pay today's prices for future tuition at any university.

Ohio has raised the cost of participating in its program by 18 percent over the last year, and annual contributions per student are now limited to $2,000. (There was no limit before.)

Kentucky recently banned anyone new from entering its prepaid tuition program until June 2004.

The changes do not affect contributions that people already have made to the plans. But they probably will make the plans less attractive to parents searching for college-savings options.

Here's how prepaid tuition works:

A parent or other contributor makes payments into an account for a future college student. The state invests those contributions. In return, it promises to pay some or all of the student's tuition costs when he or she is ready for college - regardless of how expensive that tuition has become.

The students can use the accounts to attend any university, but the state's guarantee refers only to the average cost of an in-state, public university.

In Kentucky, contributors make monthly or lump-sum payments to the plan. In Ohio, they purchase tuition credits, each of which is later redeemable for a 1 percent discount off tuition.

Under such programs, states are betting they will earn more on their investments than they will pay out in tuition. If their calculations are off, they must raise the cost of tuition credits to keep the program solvent.

This is what Ohio has done. In January 2002, one tuition credit cost $59.50, said Judy Cunningham of the Ohio Tuition Trust Authority.

Since then, the price has increased several times to the current $95.

There are two main reasons, Cunningham said: double-digit inflation in tuition costs at state universities, and decreasing returns on the state's investments.

Buying tuition credits at the current price is a bad deal for students who will attend college within the next four years. This is because for that time period, tuition credits that cost $95 a piece will be more expensive than simply paying tuition outright.

"We've always promoted this for long-term planning and saving," Cunningham said.


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