Colorado shuts down its prepaid tuition plan: 1996 statute 23-3.1-201.

THE ACT'S GOALS

* Help students and their families invest and save for college.

* Ensure that money saved for college today would be equal to the cost of college tuition tomorrow. The fund was designed to keep pace with the average tuition inflation rate at Colorado's public colleges and universities.

WHAT THE ACT DID

* Authorized the Colorado Student Obligation Bond Authority (CSOBA), an independent state authority, to develop and administer a postsecondary education savings fund.

* Allowed families to purchase "tuition units" for college. One hundred tuition units were equal to one year of resident undergraduate average tuition at Colorado's public colleges and universities.

ONE YEAR LATER

Colorado's Prepaid Tuition Plan showed promise of success in 1997. Some 7,228 families invested more than $53.5 million.

"Our first year brought in the largest number of accounts. There was much excitement over this new tax-advantaged way to save for college," says Giovanni Grecko, chief operating officer for CollegeInvest, the organization managing the savings program. "There was clearly a pent-up demand for a tax-advantaged college savings vehicle, and the Prepaid Tuition Fund, along with prepaid tuition programs across the country, got the ball rolling."

So how exactly does the plan work? The money contributed by families is invested in stocks and bonds. The investments are expected to grow at a rate comparable to the increases in tuition and inflation. When the amount is paid out in five, 10 or 15 years, for example, the amount contributed and the interest earned would cover the current price of college.

A booming economy in Colorado propelled the program forward in its first years, keeping up with its promise to grow in proportion to increases in tuition and inflation.

Tuition held relatively steady as the stock market grew rapidly. Colorado was one of 20 states with these plans offering families the opportunity to pay for a college education at today's prices.

THREE YEARS LATER

In 2000, the economic situation in Colorado began to decline. Tuition went up, and the stock market started a slight tumble. The Prepaid Tuition Fund was modified to require at least a 4 percent minimum rate of return per year over the life of the investor's account.

For example, if a family decided to cash out the investment for their child's college education and the account had not earned a 4 percent average return, the account value was increased accordingly in order to meet the minimum requirements. This modification was implemented in order to protect families and give them some peace of mind that they would be earning at a least a 4 percent return on their college investments.

FIVE YEARS LATER

The Prepaid Fund was forced to shut out new investors in August 2002 because of a concern that the state wouldn't be able to protect assets and remain solvent. Although other states, such as Kentucky, Texas and West Virginia, suspended their enrollments, Colorado took the lead in closing its program in order to protect current investors and not harm future contributors.

"The state had assets to protect, and we saw the potential for problems. We were the first state to take account of the hiccup in the economy and became concerned about our current investors, as well as new contributors' tuition liability in the future," Greco says.

The recession and a slumping stock market caused the state to cut millions from higher education.

Colorado's colleges and universities were forced to raise tuition beyond the fund's capacity to grow. The state wasn't sure it could guarantee a 4 percent return on contributors' investments. The Colorado Bond Authority was forced to tap into a reserve of $7.7 million to keep the program in operation after the Colorado legislature declined to bail it out. The bond authority worried that it would not be able to make payouts to investors.

In 2003, investors were given the option to either withdraw their funds completely, move them to other savings plans, such as a $29 Plan, or leave their funds right where they were with the understanding that there would be additional modifications. The plan would be set at a cumulative 5.5 percent return on investment, no matter the condition of the stock market or rate of tuition increase. Investors had 90 days to decide. Forty-five percent stayed in the fund, and 40 percent rolled over their investments into another college savings account. Fifteen percent took their money elsewhere. In a span of less than three months, the fund's assets dropped by nearly 47 percent from $64 million to $35 million.

"The changes to the program were a prudent move at the time," Greco says. "Investors have expressed appreciation for our foresight. The plan is now a better vehicle that is more structurally and financially sound for those currently enrolled in it."

Critics of prepaid tuition plans say they simply are not structured right. The plans were designed to protect families from high tuition increases; however those increases are exactly what is hurting them.

"Families benefit from a prepaid tuition program during times when tuition increases outpace the returns that could be realized from other investments," says Joseph F. Hurley, founder and CEO for Savingforcollege.com. "But the conditions we've been experiencing over the past three years can quickly cause such a program's financial health to deteriorate."

The College Savings Plan Network reported that as of 2003, the combined assets of the 20 states with prepaid savings programs was $35 billion with the number potentially growing to nearly $300 billion by 2010.

SIX YEARS LATER

A low-risk college savings plan called the Stable Value Plus Program was launched in 2003 as an alternative to the Prepaid Tuition Fund. It was designed to protect the principal contribution by providing a 4.1 percent return on investment through 2003 and 3.04 percent guarantee for 2004. The investment is not exposed to general market risks and fluctuations because the program does not rely on market returns. Instead, it offers a guarantee of principal and an annual rate of return, says Greco. It is intended for those wanting a more modest alternative. A state guarantee, however, does not exist to protect investors if the plan is not able to produce the required return. This means that no law exists requiring the state to bail out the program if it doesn't have the money to pay out to its investors. The Colorado Student Obligation Bond Authority introduced legislation in 2003 to obtain a state guarantee on the fund, but the bill did not pass out of committee.

COLORADO PREPARED TUITION FUND

(ACCOUNTS AND ASSETS 1998-2003)

             Total Assets    Number of Accounts

9/30/1998     $53,641,000           7,228
9/30/1999      85,061,000          11,081
6/30/2000      90,291,000          11,385
6/30/2001      82,710,000          10,970
6/30/2002      92,065,000          11,921
6/30/2003      40,251,000           5,226

Source: CollegeInvest, 2004

Christine Walton tracks higher education issues for NCSL.