A proposal to change a prepaid college savings plan would make it more affordable and flexible for future college students, state auditors found.
Prepaid529, one of several options through the Virginia529 program, currently allows buyers to pre-purchase semesters at public Virginia colleges and universities. Residents pay today’s tuition rates and the state guarantees to pay the full tuition in the future.
But that system has been confusing, and a high buy-in cost appears to have discouraged people from investing more in the program, said staff from the Joint Legislative Audit and Review Commission during presentations to lawmakers earlier this month.
In an audit completed earlier this year, JLARC staff noted that Virginia529 wants to alter the payout structure of the program in response to a 2016 sustainability study.
Instead of paying participants out the amount of tuition and mandatory fees at the public Virginia college, Virginia529 staff considered a “weighted average tuition” payout structure, or WAT.
The WAT payout is based on the average tuition and fees paid by students in the year the plan is established. Under that model, payout would be the same for every student participating in a 529 plan.
In some cases, the payout would be less than tuition, the JLARC study noted, and students would have to cover the difference. If the payout was more, students could use the extra money for costs like room and board.
The WAT plan JLARC staff reviewed this week was one proposed during the last General Assembly session. The Senate passed its version of the bill, but it stalled in the House Appropriations committee, where lawmakers wanted more information on the change.
“I like the proposal today,” said Speaker of the House Kirk Cox, R-Colonial Heights. “It will make those schools who are really striving for affordability a little more attractive.”
In October, Cox submitted a letter to the editors at the Richmond Times-Dispatch detailing a sweeping vision for education reform. The retired teacher touched on affordability, vocational training and including the business community.
Under the proposed WAT model, buyers would need to purchase 100 units to cover one year of college. The cost of those units would change, depending on tuition costs across the state. JLARC assumed tuition would increase 6.5 percent every year.
This year, units would have cost $160 each, or $16,000 for a full year.
Units are more flexible and people can purchase more as they want to, said Mary Morris, CEO of Virginia529. The current plan is a contract, so people commit to buying a number of semesters and then can pay upfront or put down a down payment and make a regular monthly payment.
But units can be purchased as families have the money, and they can be cashed in for part-time schooling, single courses and used for other college costs, like supplies, Morris said.
Although there’s been a general decline in prepaid 529 plans across the country, there are still people buying the plans in Virginia, Morris said. They’re just buying less, usually because it costs a lot to establish an account.
In 2017, 3,683 people purchased Prepaid529 plans. Eighteen percent of them were for eight semesters, which would be four years of college. Last year, 57 percent of contracts were for one and two semesters, said Devon Copeland, spokesperson for Virginia529.
In 1996, when the program launched, 76 percent of plan participants bought four-year contracts, Morris said.
At the end of June, there were 63,000 Prepaid529 accounts in the state, according to a presentation Morris gave lawmakers.
Cox said affordability is one of the big problems with 529 programs that still has to resolve to encourage more participation.
As tuition increases, it becomes more expensive to purchase a semester. One way to make 529 accounts more appealing is to lower some of the fees associated with it, Cox said.
In August, Del. Steve Landes, R-Verona, introduced a bill over the summer that will cap the amount of money in an account that goes toward “pricing reserves” that keep the fund stable. Right now, the 529 program is 138 percent funded, and as long as it stays above 105 percent funded, participants will only pay a 5 percent pricing reserve fee under Landes’ bill.
Morris said dealing with that is different than changing the payout model, and Virginia529 is working through Landes’ proposal before the General Assembly session starts.