College savings plan running a 17 year deficit

By Steve Wilson
April 17, 2019

There are student enrolled in the Mississippi Prepaid Affordable College Tuition Program and heading off to college that are the same age as the plan’s net deficit: 17 years old. 

According to the most recent report by State Treasurer Lynn Fitch’s office that was released in June 2018, the unfunded liability of part of the plan is $127 million and growing at the rate of 6.3 percent per year. The plan, if the deficit continues, will be insolvent before the end of fiscal 2028.

The problem for taxpayers is that they will be on the hook for the deficit, as the plan is guaranteed by the full faith and credit of the state.

One of the reasons for the plan’s financial woes is the rapid increase in the cost of attending college.

According to the latest report from the College Board, the national average tuition and fees at a public four-year school have increased 69.93 percent from $6,020 in 1998-99 to $10,230 this year. The plan assumes a 5.5 percent annual increase in the cost of attendance in its financial projections, which about 2.2 percent more than the national average cost increase.

MPACT is what is known as a 529 plan, which have tax advantages are designed to encourage saving for future educational costs. There are two types of these plans: prepaid tuition plans and educational savings plan. MPACT is the former and parents pay into the plan, which then covers tuition and other expenses.

In 2012, the board that manages MPACT voted to stop accepting new enrollees because of the plan’s financial woes. After an audit in 2013, the plan was split into two plans: Legacy and Horizon and began accepting new enrollees.  

As of June 2018, the Legacy plan has $278 million in assets, but has $405 million due in the form of tuition and expenses to be paid to plan participants. 

MPACT does have investment income, but like with pension funds, the decade-long bull market hasn’t generated enough returns to smooth over the annual shortfall. A 2016 study found that the plan would be insolvent by 2025 and that date has been pushed back three years thanks to better-than-expected investment returns.

YearInvestment income

Legacy plans were those purchased from the plan’s creation in 1996 by the legislature until 2012. Despite an expected rate of return on investment of 6.8 percent, the plan is only 69.67 percent fully funded. 

YearTuition payments

Those numbers will likely get a lot worse, since Legacy plans are closed to new enrollees.

According to 2016 projections, the Legacy plan will have a $401 million deficit by 2032 and a $628 million hole by 2038. 

The Horizon plans were those purchased since 2015. These plans are fully funded, up to a rate of 113.08 percent. Those plans have $35 million in assets and $29.4 million due for tuition and fees. The Horizon plan assets will not be used to pay Legacy benefits and vice versa.

MPACT was nearly fully funded as recently as fiscal 2007, when it was 95.2 percent. That fell to 84.3 percent as MPACT’s market value dropped from $207 million to $192 million.

There are differences in the plans that are designed to help the plan’s long-term financial health. For one, the Horizon plans are anywhere from 60 to 90 percent more expensive than their corresponding Legacy equivalent.

Legacy plans pay 100 percent of public in-state undergraduate tuition rates and mandatory fees. For out-of-state or private institutions, MPACT pays a rate equivalent to a weighted average of tuition and fees at Mississippi public colleges and universities. 

Horizon contracts are the same as Legacy ones for in-state public community colleges and universities and the weighted average for out-of-state or private institutions. Where Horizon contracts differ are specialty courses of study. If the specialty course of study exceeds the standard undergraduate tuition rate at the institution, MPACT won’t cover all of it.

Also, Legacy plan holders have 10 years to use their benefits from their projected college enrollment date. Horizon contracts are allowed up to eight years.

If the plan was eliminated by the legislature, any qualified beneficiary that was accepted by either a state university or community college or a private, accredited institution either in state or out of state and within five years of enrollment would be entitled to the complete benefits of the program.

Any other contract holders who didn’t meet the above criteria would receive a refund of the principal paid into the program, plus interest.


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