Hi Terry

Your articles on this topic are really insightful -have gone thru all of them. I had a quick question. I have 2 IL prepaid plans (bought in 2012) for my 2 kids (currently aged 9 and 4). I have a 10 year equal payment plan - have paid 5 years as of now. Given the current situation does it make sense to continue with my plans or take the money out and invest in some other 529 (like Vanguard, Brightstart etc)? Looking forward to your advise.

Thanks
Priya

Terry Says:

OK, this is a complex situation.  The bottom line is that I have concerns about the ability of the State of Illinois to fulfill its promises regarding the CollegeIllinois!Prepaid Tuition plan.  Here’s why:

The plan itself is funded by a trust fund.  See this link for the enabling legislation.  All the monies collected must be set aside in a special trust fund, and invested appropriately to fund the promises.

Every year the trust fund must provide an annual report.  Here is the link to the latest report — from June,2016.  You will see the fund is at the 79 percent funded level, which is acceptable.  In fact, since the recent stock market rally, this year’s report, due out in June 2017, will likely show a higher funding percentage.

BUT that funding ratio is based on a big assumption, besides investment performance. It is that existing contract holders (like you) continue to pay on their contracts. And to make good on ALL the promises, there is an assumption that new contracts will be purchased.

(Yes, it’s sort of like the Social Security Trust fund — except that Social Security has a much larger base, and a very large constituency for making sure payments continue.)

However, the wording of the legislation provides that the Governor must direct the Legislature to make up the shortfall in any year where the assets cannot support the promised tuition payouts.   It is supposed to be part of the budget.  You may have noticed that Illinois hasn’t had a budget for the past nearly 3 years.  And when we do, I don’t think this issue is going to be near the top of the list for bills to be paid if there should be a need for a state  contribution!

That generates a lot of uncertainty — like your post.  And if people are uncertain and do not continue contributing, the fund will most certainly become insolvent in the future.

And here’s what would happen then, according to the enabling legislation:

In the event the Commission, with the concurrence of the Governor, determines the program to be financially infeasible, the Commission may discontinue, prospectively, the operation of the program. Any qualified beneficiary who has been accepted by and is enrolled or will within 5 years enroll at an eligible institution shall be entitled to exercise the complete benefits specified in the Illinois prepaid tuition contract. All other contract holders shall receive an appropriate refund of all contributions and accrued interest up to the time that the program is discontinued.

That means parents of young children, who start most contracts, have a realistic worry about their ability to pay for college in the distant future.  And that could become a self-fulfilling prophecy!  This is just more fallout from our irresponsible state government.

I have nothing against the concept of prepaid tuition plans.  In fact, I contributed to one for my young nephew who is a resident of Florida.  But the situation in Illinois worries me.  And I feel it is my responsibility to give you The Savage Truth.

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