For parents who think they are doing the right thing, financially, to prepare for their children’s college years, there is a troubling article in today’s Times by Sean D. Hamill.

It points out that most of the nation’s prepaid college investment funds, offered by 18 states, are in trouble. Those funds pledged to cover the cost of attending their state’s public colleges and universities, regardless of how much tuition increased.

The funds — not to be confused with 529 college savings plans that do not promise a specific return —are facing two problems: their investments in the stock market have declined sharply in value and the tuition at most public colleges has been rising much faster than in the past.

Even with stock market gains since March, the losses have forced some programs, like Pennsylvania’s and Washington’s, to impose new and higher fees that could amount to thousands of dollars a year in additional costs to parents.

Others, like South Carolina’s, have developed doomsday scenarios, capping how much a family would get if the program shut down completely. West Virginia had to pump $8 million into its prepaid program to help restore its financial health because its fund lost 25 percent of its value in the last year. And Alabama closed its program to new enrollees because the fund lost almost half of its assets — more than $300 million — in the stock market in the last year, and the state might have to put its own money in to keep it solvent.

“I think ultimately more and more of these plans are going to close down to new investments,” said Mark Kantrowitz, the founder and publisher of FinAid.org, a financial aid Web site.

The article points out that no investor has lost money in the plans, but that some states may have to kick in state funds in order to meet their obligation to achieve a set return on investments.

Mr. Hamill spoke with a family dealing with what has happened to such funds:

Ganesh Seshadri has invested $200,000 in Pennsylvania’s fund, which has lost about 25 percent of its value. He is philosophical about the fund’s losses, which have not affected his investment, though he has stopped investing in it because of the increased fees and costs imposed recently.

“If I get back the return they promised, it will be a good investment, because all of my other investments tanked,” said Mr. Seshadri, 55, a hospital computer analyst in Murrysville, Pa. He has children at Northwestern University and Carnegie Mellon, and one in high school.

Source: http://thechoice.blogs.nytimes.com/2009/10/05/troubling-news-about-some-prepaid-college-tuition-savings-plans/

Saving for college is always difficult and is even more so during the current economic downturn. One of the most popular college savings plans are so called “529 plans.” The IRS recently announced that participants in 529 plans will be able to change their investments more often in 2009 than in past years. The IRS will allow a change in investment strategy twice in 2009. This is good news for 529 plan participants, especially those who may otherwise be locked into a mix of investments that has turned out to be more speculative than initially contemplated.

Tax-Free Distribution A 529 plan is qualified tuition program. By contributing to a 529 plan, taxpayers contribute to an account established for paying a student’s educational expenses. Eligible educational expenses may include the costs of tuition, books, and fees at eligible institutions, such as colleges, vocational schools, and other ostsecondary institutions.

Contributions to 529 plans are not tax-deductible, however, although earnings are tax-free, and distributions used to pay the beneficiary’s qualified education xpenses are tax-free.

A 529 plan should not be mistaken with a Coverdell Educational Savings Account (Coverdell ESA). The latter is also a savings account for education expenses that offers tax-free distributions, but funds saved in a Coverdell ESA can be used for elementary and secondary school expenses as well as college costs.

Investment Choices Generally, participants in 529 plans must select only from among broadbased investment strategies designed exclusively for the program. Now, the IRS has traditionally permitted a change in investment strategy only once a year.

Because of the economic slowdown and the turmoil in the financial markets, the IRS will allow investments in a 529 plan to be changed during 2009 on a more frequent basis. A 529 plan won’t violate the investment restriction if it permits a change in the investment strategy twice in calendar year 2009, as well as upon a change in the designated beneficiary of the account.

source: http://www.supremearticles.com/irs-eases-investment-rules-for-529-college-savings-plans

Stock brokers and brokerage firms are being warned by the Financial Industry Regulatory Authority (FINRA) to rethink their selling strategies of 529 college savings plans. At a recent compliance meeting in Florida, FINRA reportedly urged the brokerage community to step up its due diligence of 529 plans, as well as assume responsibility to watch over money managers associated with the plans.

In recent months, 529 plans across the country have faced increased scrutiny from state and federal regulators. In April, Oregon sued OppenheimerFunds, charging the money manager of understating the risks it took with a fund in Oregon’s college-savings plan. The fund was the Oppenheimer Core Bond Fund, and Oregon is suing OppenheimerFunds for losses totaling $36 million.

The Oppenheimer Core Bond fund lost 36% in 2008, compared with the benchmark index, the Barclays Capital Aggregate Bond index, which rose 5.3%.

Five other states – Illinois, Maine, Nebraska, New Mexico and Texas – currently are investigating whether OppenheimerFunds breached its fiduciary duty to investors in state-sponsored 529 plans when it failed to disclose the fund’s exposure to risky mortgage-backed securities and derivatives. In June, the Illinois treasurer’s office announced a tentative agreement to recoup $77 million from OppenheimerFunds. All five states are in talks with the company, according to a July 9 story in Pensions & Investments

source: http://www.investorprotection.com/blog/2009/07/14/finra-tells-brokers-to-revisit-selling-tactics-of-529-college-savings-plans/

The economic stimulus plan that was passed earlier in 2009 increases the maximum Pell Grant, from $4,731 currently to $5,350 starting July 1 and $5,550 in 2010-2011. This Federal Financial Aid Grant is intended to help the lowest-income students attend colleges or universities. The maximum grant should cover about 75% of the average cost of a four-year college. The plan also increases the number of students who will be eligible. In fact, now, 800,000 more students, or about 7 million, may qualify for Pell Grants.

In addition, the 2009 economic stimulus package increases the tuition tax credit to $2,500 and makes it 40 percent refundable. Due to this boon, families and individuals who don’t make enough to have to pay income tax could still get as much as $1,000 in extra tuition help.

Better yet, computer expenses are now an allowable expense for 529 college savings plans – a big positive for online degree seekers!

The package spends an estimated $32 billion on higher education – so don’t get left behind. Take advantage of the benefits offered to help you get ahead.

Unemployed? Think you may be out of a job soon? It makes sense to start increasing your credentials now. When you have earned your college degree, you’ll be able to find better jobs with higher pay.

Find out more about what is available for you and get started earning your college degree.

source: http://www.toparticlesdir.com/reference-education/economic-stimulus-plan-increases-help-for-college-tuition/953

Although I do not have children, I am considering starting to save for college. With the cost of tuition rising well above levels of inflation, the sooner I get started, even before any children exist, the higher the chance my child or children will be able to go to school without an insurmountable pile of debt. Unfortunately, most college savings plans are complicated. They are tax efficient, but only if some conditions are met. If you need to withdraw money from the funds for purposes other than education, you can face penalties. There are a number of variables to consider, least of all is the idea that I may not have children at all.

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Kiplinger’s Personal Finance has named its top five 529 college-savings plans to help parents or possible future parents like me decide which options to pursue. None of these options sound perfect, however. I do not like the sound of any of these top five, either due to flexibility or fees. In addition to fees by the dollar, all plans charge a management expense, fees as a percentage of assets, in addition to the underlying funds’ management expense.

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Illinois Bright Start College Savings Program. Pros: Low fees. Cons: Low fees only apply to actively-managed funds (poor performers). If you choose Vanguard funds you must pay $10 per fund.

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Alaska’s T. Rowe Price College Savings Plan. Pros: Good investment options. Cons: $25 yearly fee for some accounts.

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Michigan Education Savings Program. Pros: Plan includes a guaranteed return option. Cons: The plan is run by TIAA-Cref.

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College Savings Plan of Nebraska. Pros: Investors can choose from a wide variety of mutual funds. Cons: Every account has a $20 annual maintenance fee.

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Virginia CollegeAmerica. Pros: Kiplinger’s counts the fact that this plan is sold by financial advisers as a pro. Cons: The plan includes only funds from American Funds, which are expensive and underperform.

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Kiplinger’s also includes a state-by-state guide to 529 plans. Use this guide to determine whether your state offers its own plan with tax benefits. The benefits may compensate for the other drawbacks of the plan. I live in New Jersey, which does not offer any 529 plans with tax benefits, but I could invest with another state’s plan. While I live in New Jersey, I would not be able to benefit in the other state’s tax advantages.

source: http://www.consumerismcommentary.com/2009/07/01/kiplingers-best-529-college-savings-plans/

A settlement being hammered out between OppenheimerFunds Inc. and five states whose Section 529 college savings plans lost money in the firm’s Core Bond Fund could pave the way for investors to recover some of their losses, and that would be a shot in the arm for the ailing industry, according to observers.

“I think the settlemewill help rebuild the reputation of 529 programs in general, and Oppenheimer in particular,” said Bridget Beardon, a research analyst for Boston-based Financial Research Corp. “Program managers will have to be that much more cautious about investment options, and state boards overseeing 529 plans will have to scrutinize investment strategy and philosophy that much more closely.”

Jonathan Sard, a certified financial planner and president of Sard Wealth Management Group LLC of Atlanta, which has $80 million in assets under management, agrees.

“A settlement will give investors in a 529 plan more confidence knowing that a fund that was understood to be conservative can’t take such a high level of risk and not have to pay a price,” he said.

College savings plans have seen assets decline 22% from $109.8 billion at the end of the first quarter in 2008 to $85.9 billion March 31, according to FRC.

In addition, some 529 plans have been criticized by financial advisers and investors for not offering adequate transparency and protection of investments.

Details of the what industry observers said would be an “un-precedented settlement” are being negotiated between New York-based OppenheimerFunds and Illinois, Maine, Nebraska, New Mexico and Texas. It would be critical, especially for program managers.

“A settlement of this kind would be unprecedented, and I don’t think it would be good for program managers,” said Joe Hurley, president and chief executive of Pittsford, N.Y.-based Savingforcollege.com LLC. “It’s difficult to assess the impact until we see the details. I think they would probably frame an agreement to lessen the risk of it opening a Pandora’s box for other funds.”

Without such a provision, Mr. Hurley said, other state treasurers responsible for 529 programs “will take notice, absolutely.”

The total amount of the settlement and its impact on OppenheimerFunds’ bottom line will be critical, industry observers said.

Illinois is seeking to recover $77 million for investors in its Chicago-based Bright Start College Savings Program as a result of losses from the Oppenheimer Core Bond Fund, which was billed as a conservative investment option but lost 36% of its value in 2008.

The amount of money Maine, Nebraska, New Mexico and Texas are seeking to recover has not been disclosed.

“It could be hundreds of millions of dollars,” Ms. Beardon said.

Such a large amount could be damaging to OppenheimerFunds’ profit margin for its 529 business, according to industry observers.

Negotiations are at a “critical juncture,” said a spokesman for the office of Illinois Treasurer Alexi Giannoulias in Chicago.

Jason Hayes, chief deputy state treasurer for Nebraska, said he could not comment on details of the negotiations but is “optimistic” about the progress to date.

OppenheimerFunds also ex-pressed confidence that a settlement can be reached.

“We’re moving ahead rapidly with discussions, and we look forward to potentially putting the matters relating to the 529 plans we manage behind us,” said Jeaneen Pisarra, spokeswoman for OppenheimerFunds, which is a division of MassMutual Financial Group of Springfield, Mass.

For now, program managers and state administrators view the Oppenheimer fund’s meltdown as an isolated incident, and not one that will be damaging to other program managers in the future.

“I think it was an isolated case of a bad decision by a single portfolio manager in an unprecedented collapse of derivative markets,” said Peter Mazareas, vice chairman of the Washington-based College Savings Foundation and chief executive of Nahant, Mass.-based Strategic Advancement Group Inc.

“I think what we’ll see as a result is increased stewardship of program managers to oversee portfolio managers to make sure their style is pure, as well as increased responsibility by state investment boards to ask the right questions about investments in their 529 plans.”

While Dan Ebersol, chairman of the Lexington, Ky.-based College Savings Plans Network, applauded the states negotiating with OppenheimerFunds for their “active role” in pursuing a settlement, he downplayed its long-term impact.

“I would not overemphasize the precedent-setting nature of a potential settlement. I think it would be a unique occurrence that came about as a result of a once-in-a-lifetime market event,” said Mr. Ebersol, who is also director of the Georgia Office of Treasury and Fiscal Services.

The negotiations are widely seen in the 529 industry as an indication of OppenheimerFunds’ eagerness to put the bad publicity behind it and expand the firm’s college savings plans business.

“The discussions are definitely a reflection of our commitment to staying in the business,” Ms. Pisarra said.

Indeed, last week, OppenheimerFunds was believed to be among the finalists selected to interview for the direct-sold U.Fund College Investing Plan, whose contract with Fidelity Investments of Boston ends this year.

While OppenheimerFunds’ negotiations with Illinois, Maine, Nebraska, New Mexico and Texas appear to be harmonious, the company’s legal battle with Oregon, where the Core Bond Fund’s troubles first became public, is anything but.

Oregon filed a lawsuit against OppenheimerFunds in April seeking to recover $36.2 million that the state claims its 529 investors lost as a result of the Core Bond Fund’s taking “extreme risks in a search for speculative large returns.”

OppenheimerFunds in May moved the case to U.S. District Court for the District of Oregon and filed a motion to dismiss the suit.

This month, Oregon filed a re-sponse arguing against dismissal and also filed a motion to move the case back to state court in Marion County.

source: http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090621/REG/306219979