State Bails Out Prepaid College Savings Program, Again

The state of Tennessee is bailing out a struggling trust fund that allows families to prepay for college at current tuition rates. The budget that goes into effect this month pumps $15 million into a program which was designed to be self-sustaining.

Nearly 10,000 families have accounts in the state’s Baccalaureate Education System Trust, known as BEST, including Aaron Painter of Nashville.

“I’ve thought about this BEST program the same way I thought about buying a house. It’s not putting money in somewhere where you don’t know where it’s going. You know the state is going to bear the risk on it. That made sense.”

Painter says the offer is hard to resist. Right now, $7,000 will buy a year of college for an infant that will cost upwards of $24,000 when he turns 18. The state invests the money during that time, with the idea of staying ahead of tuition increases – but that hasn’t happened. The legislature had to inject $26 million as the stock market began declining in 2007, and another $15 million this year, even as lawmakers considered layoffs and other severe budget cutbacks.

Claude Pressnell oversees the association representing Tennessee’s private colleges and also sits on the prepaid college trust fund board. He has doubts the program in its current form is sustainable. Pressnell says prepaid rates either have to go way up or the state has to get out of the prepaid tuition business altogether.

“Whatever it is, it needs to begin to clearly take care of itself and rise and fall on its own financial bottom.”

With the infusion of $15 million, spokesman Blake Fontenay says the trust fund is actuarially sound for now. Enrollment is still open, though five other states have suspended similar programs this year.

Prepaid tuition has turned out to be a great deal for those who are now redeeming their credits. But with the program’s longevity in question, the Treasury Department is turning parents toward a more traditional 529 college savings plan, where the investor assumes the risk instead of the state.

According to the College Savings Plans Network, Tennessee is one of just 13 states to continue its prepaid tuition trust fund.