COLLEGE INVESTMENT PLAN MAKES SENSE

Delaware State News
By Jack Markell
October 31, 2003


In light of recent news around the country that states are suspending their prepaid college tuition plans, the Delaware College Investment Plan is looking better all the time. Families saving for college as well as all taxpayers continue to benefit from the state's decision to create a savings plan, rather than a prepaid tuition plan.

States are suspending enrollment in prepaid tuition plans because of rising costs and plummeting investment values. 

These prepaid plans promised more than they could deliver. They are supposed to allow families to lock in tuition at guaranteed values. Families typically purchase tuition credits, based on current rates. States then invest the funds in long term investments. The theory goes that that earnings on the investments will keep up with tuition increases. The theory hasn't worked. Tuition is rising faster than investment earnings. For one thing, most states' budgets have been under considerable pressure, so support of institutions of higher education has waned. In addition, investment results over the last few years have been poor. The net effect: universities have had to increase tuition and investment earnings have not kept pace. Without suspending the plans, taxpayers could end up holding the bag.

According to the Associated Press, Ohio, West Virginia, Kentucky, Texas and Colorado have all cut off enrollment.

In Delaware, the situation is different. Wisely, legislation sponsored by Rep. Bill Oberle and passed in 1997 (prior to my involvement in state government) created the Delaware College Investment Plan, pursuant to Section 529 of the federal Internal Revenue Code.

Instead of a prepaid tuition plan, which would have potentially put taxpayers on the hook in the case of an earnings shortfall, the College Investment Plan is a tax-advantaged vehicle to help families save for college expenses. The plan has been a terrific hit, not just in Delaware but across the country.

More than 16,000 families have invested more than $140 million in the Delaware College Investment Plan over the last five years. Much of the growth has occurred in the last two years, since President Bush signed legislation making earnings free of federal taxes, so long as they are withdrawn for qualified educational purposes. The tax law provision is set to expire in 2010 unless federal legislation is passed and signed to extend it.

Delaware's plan is managed by Fidelity Investments. Fidelity offers a range of investment options. Many families invest in the "age-based" portfolios, which actually represent underlying baskets of Fidelity mutual funds. These portfolios are designed to automatically become more conservative over time, so that by the a student's high school years, there is relatively little fluctuation in the funds' values. This gradual change is made possible by a shift from investments in stocks to investments in fixed income securities.

Other portfolio options, including all stocks and no stocks, are also available. However, the Delaware College Investment Plan is not designed to be a trading account, so once an investment is made in a particular portfolio, it can be moved only once a year.

Funds invested in the plan belong to the investors; they do not belong to the state. In fact, the state does not stand behind the investments, so participants must be prepared to have their funds exposed to market fluctuation, including decreases in value.

The Delaware College Investment Plan is very flexible. Although it's sponsored by the State of Delaware, the student, the parent or grandparent funding the account and the college to be attended, can all be elsewhere in the country.

With tuition continuing to increase, with fewer federal resources available and with a difficult economy generally, families are best served by starting to save for college education early. That's why we distribute information about the Delaware College Investment Plan to elementary schools throughout the state. If you are interested, call me at 302-744-1001, Fidelity at 1-800-544-1655 or log on to www.fidelity.com/delaware.