Legislators are weighing what to do with a $1 billion surplus from Virginia’s college savings program

A Virginia college savings program has accumulated more than $1 billion in surplus revenue — money that could potentially be reinvested in financial aid and other higher education initiatives.

Lawmakers directed the Joint Legislative Audit and Review Commission, a state watchdog agency, to study the possibility after reviewing a regularly scheduled audit of a now-discontinued program known as Prepaid529, which stopped enrolling new participants in 2019. The investment fund allowed Virginians to purchase semester-long contracts that covered future tuition and fees at both in- and out-of-state schools.

“We believe there’s a substantial amount of that surplus that can be used for other purposes,” JLARC Director Hal Greer said at the commission’s Tuesday meeting. Auditors projected the excess revenue could swell to $3.8 billion by 2044, when the program is estimated to pay out the last of its remaining contracts.

Some of that overfunding has been by design. Enrolling in Prepaid529 locked in tuition rates at the time of purchase and worked somewhat like a 401(k), with contributions pooled into a larger investment fund. Each contract had a built-in premium to make sure the payouts reflected future inflation or tuition increases.

“It’s really critical that the fund is always in a good position to pay out future obligations,” said Jamie Bitz, JLARC’s chief legislative analyst for ongoing oversight. But funding for the program has also factored in projected tuition increases and inflation rates that are “at the high end” of reasonable assumptions, according to auditors from Gabriel, Roeder, Smith & Company, an independent firm that analyzed the program. 

Historically, the state has funneled extra revenue from other investment plans — specifically CollegeAmerica, a similar tuition savings program offered through a private mutual fund company — into Prepaid529. That, coupled with higher-than-expected returns, has contributed to the growing surplus, JLARC analysts found.

How much of the excess revenue should be reallocated is still an open question. JLARC’s 14 legislative members unanimously passed a resolution directing the agency to analyze how the surplus could be used to “to support higher education access and affordability in Virginia.” It’s a broad goal that could include financial aid for disadvantaged students, but the agency is still in the process of developing recommendations.

“We’re reluctant to speculate, but we think it does merit a critical look at how this revenue could be used to support other goals,” said Kimberly Sarte, the agency’s associate director for ongoing oversight and fiscal analysis. 

JLARC analysts are also pondering whether Prepaid 529 should be combined with the new Tuition Track Portfolio program, a replacement fund that offers buyers more flexibility in how and when they invest in future costs.