October 5, 2009

State tuition funds in red

State funds that promise to cover the cost of tuition at U.S. public colleges and universities are being squeezed financially, a financial aid expert said.

I think ultimately more and more of these plans are going to close down to new investments, Mark Kantrowitz, founder of FinAid.org told The New York Times.

Sixteen of 18 prepaid college savings plan funds are now losing money, putting the promise of covering tuition at risk, the Times reported Monday.

The squeeze is on as stocks have not performed as well as expected and many states are giving their higher education programs permission to raise tuition.

Some states have capped benefits, while others have closed themselves to new investors. Alabama lost half its assets in the stock market in 2008 -- more than $300 million, the Times said.

Every time there's a significant market downturn, there's two main ways states make up for the losses: close to new participants to cut off the losses or raise fees. And raising fees makes it less attractive to new participants, Kantrowitz said,