Illinois Tuition Program May Need $1.6 Billion Rescue

Published December 28, 2011

The College Illinois! prepaid college tuition program needs a bailout in order to stay solvent, according to an analysis completed for the Illinois Student Assistance Commission.

According to financial consultant Gabriel Roeder Smith & Company, the program has a deficit of nearly $560 million and needs $1.6 billion to stay solvent for the next 25 years. Program underfunding, failure to account for quickly rising college costs, exaggerated return on investment expectations, and poor investment performance are the main problems.

The program has suspended sales of new contracts. If no new contracts are sold, the shortfall will develop between 2022 and 2036 to pay for past contracts coming due, the report adds. The contracts are supposed to allow parents to pay in advance and lock in lower tuition rates for their children to attend state colleges and universities.

‘Questionable Investment Decisions’

“With the recent announcement that College Illinois! has suspended the sale of new contracts, many concerned families have contacted my office,” said State Rep. Jim Durkin (R-Western Springs), whose family has bought College Illinois! contracts. “I believe that Chairman Kym Hubbard’s decision is not leading College Illinois down the path of closure. I believe this is a chance for the Illinois Student Assistance Commission to take a step back and evaluate the fund.”

Durkin said he would “like to see timelier reporting standards on the investments and liabilities in the fund,” and added, “advertising, administrative costs, salaries and operational costs are all draining the investment fund, and this must stop immediately.”

Durkin has introduced legislation to require College Illinois! to make investment decisions in open meetings. Those decisions currently are exempt from public review.

“There were questionable investment decisions made under the previous College Illinois! administration which possibly would not have been made if the families who own these contracts were in the room or aware of these investment choices,” said Durkin.

‘Comes Down to Mismanagement’

“Prepaid college tuition plans, such as College Illinois!, are designed to act like a ‘pension’ for college tuition in that you know what goes in and what should come out,” said Joe Orsolini, president of College Aid Planners, Inc., of Glen Ellyn, Illinois. “Given the performance of pensions in this country it is not a great shock that this type of ‘college pension plan’ is running into difficulty, especially when college tuition and fees increase 5.6 percent nationally per year over the past decade. Keeping pace with college tuition is like trying to catch a moving train.”

“It comes down to mismanagement,” said Andrew Schrage, co-owner of Money Crashers, a Boston, Massachusetts.-based personal finance site ( geared to young adults and teens. “College Illinois! made some bad investment decisions. They weren’t factoring in the underfunding of the account. They weren’t having people make the payments they needed to in order to match the withdrawals.”

Another problem, according to Schrage, was the failure to recognize the quickly rising cost of college, a rate that has far outstripped inflation for many years, putting more pressure on fund managers to attempt to garner higher returns with the risky investments.

Schrage says the program made too many bad investments in risky financial instruments in order to increase returns rather than staying with safer investments. “Managing something like this isn’t like running a hedge fund. They should have recognized the problem a lot sooner. Only in the last quarter did they realize that there was a problem.”

Worst in Nation

Though there are other states with similar prepaid tuition programs, and some of the other ones have underfunding problems as well, College Illinois! is in the worst shape of any of them, Schrage says.

If the state does bail out the program so that it can continue, Schrage recommended that administrators lower their promises and expectations for future returns for any new participants. However, Schrage says, the negative publicity College Illinois! has received may make it difficult for the program to attract future participants.

Phil Britt ([email protected]) writes from South Holland, Illinois.