Investors in Alabama's prepaid college plan are a step closer to an agreement with the state that would cap the amount those students receive at an amount less than the full tuition they were promised when they signed up for the contracts.
The Alabama Supreme Court on Wednesday ordered a lower court to examine whether the state can apply a law retroactively that effectively blocked a settlement between the Prepaid Affordable College Tuition board and its participants. Under that voided settlement, both parties had agreed that students would get tuition up to the fall 2010 rates.
Alabama's prepaid college plan suffered financial trouble in 2008 and its board doesn't expect to be able to pay the remaining 37,000 participants full tuition as it increases each year. The state already has agreed to add $548 million to the program in future years, but that still won't be enough to cover full tuition in the future if it keeps rising at the current pace, according to experts.
Doyle Fuller, one of the attorneys representing PACT account holders, said this settlement is the best solution unless the stock market begins returning 20% a year, or the program gets another $350 million from Warren E. Buffett or the state legislature — “and those things won't happen.”
“I'm firmly convinced that without this settlement, or something like this, by January 2016, the PACT fund will have so few assets left that it won't be able to pay the full tuition payments,” Mr. Fuller said.
The lower court's decision, which will be reviewed by the Alabama Supreme Court, would apply only to PACT account holders but the situation doesn't inspire confidence among those investing in the nation's other prepaid college savings plans. About $21 billion is invested in prepaid college savings plans nationwide, according to Financial Research Corp.
“The situation in Alabama is recognition that some of these prepaid plans don't have the state backing that participants thought they had when enrolling,” said Joe Hurley, founder of Savingforcollege.com. “There are very real risks as borne out in Alabama, as well as in some other states that are struggling.”
The Alabama prepaid college plan closed to new accounts in December 2008.
Liz Skinner writes for InvestmentNews, a sister publication of Pensions & Investments.