College Illinois remains on a course to insolvency in less than a decade, and state officials are at last getting ready to do something about it. After a fifth straight year of dismal sales of new “prepaid tuition” contracts, the administrators of the program will present lawmakers and Gov. Bruce Rauner with some options at hearings planned for this summer.
Expected to be considered is the closure of the college savings plan to new contract purchasers. And on the other side of the spectrum: providing a statutory guarantee that the state will make beneficiaries whole if the investment fund supporting College Illinois runs dry.
Right now, that’s exactly what will happen by 2026, according to the most recent projections by actuaries for the Illinois Student Assistance Commission, which runs College Illinois.
If annual sales of prepaid tuition contracts to attend the University of Illinois at Urbana-Champaign or other state schools don’t average at least 1,000, the $891 million fund supporting those contracts will run out of money. There are nearly 40,000 College Illinois contracts outstanding.
In the latest sales season that concluded May 31, ISAC sold just The financial stakes are large—if fortunately not immediate—for a state on the verge of a junk credit rating.
If the fund were to be closed to new contract holders now, ISAC estimates the present value of the eventual shortfall in the fund at $350 million. “It’s a big problem,” says state Rep. Kelly Burke, D-Evergreen Park, who chairs the House Appropriations-Higher Education Committee.
She plans, along with possibly some other committees, to hold hearings this summer on the predicament and possible ways to address it. The aim would be to forge an agreement with Rauner and others and act in the Legislature as soon as possible on a way to build public confidence in the program, she says.
College Illinois is the lesser-known of Illinois’ two college savings vehicles. Higher-profile and more popular is BrightStart, which enables parents to save and invest for college and withdraw funds for that use without being taxed on the gains. But BrightStart, managed by the Illinois treasurer’s office, provides no guarantees of returns or that the amount saved over time will be enough to cover the price tag.
For many years, the state marketed College Illinois as an alternative, worry-free way to ensure parents had enough money for their kids to attend a state school. The program locks in a cost and then promises to cover whatever tuition turns out to be when beneficiaries are ready for college. Pricing for new contract holders changes each year.
But making good on the pledge requires accurate projections of both college-cost inflation and how much the investment fund will return each year. If those projections are off and the fund runs dry, the state doesn’t promise to make contract holders whole.
The program’s temporary suspension occurred in 2011 after a Crain’s investigation exposed ISAC’s risky investment strategy at the time to goose returns and close a yawning funding shortfall. Many contract holders also were under the impression, reinforced through misleading marketing, that their contracts carried a state guarantee to make up any shortfall.
Add to that lingering issue the impact of the state’s budget impasse, which is disproportionately hurting public higher education, and the plan clearly has lost appeal. ISAC now is openly acknowledging College Illinois is at a crossroads but would like to find a way to keep it open. “Restoring contract sales to self-sustaining is in the best interest of contract holders and the state,” ISAC Executive Director Eric Zarnikow says in an email.
Rep. Burke says she expects ISAC to present lawmakers with the option of closing the fund to new participants. That’s clearly not Zarnikow’s first choice. “Our goal is to protect contract holders, and permanently discontinuing contract sales would essentially lock in the unfunded liability,” he says.
One idea that will be considered is backing the contracts with the “full faith and credit” of the state. On its face, that seems questionable given the state’s status as a fiscal basket case with billions in unpaid bills. “That is an excellent question,” Burke says. “We’re going to flesh that out this summer.”
But the argument for a guarantee would be that if it restores public confidence enough to raise annual contract sales to a self-sustaining level, the state will save money in the long run. That is, assuming lawmakers wouldn’t abandon contract holders once the fund emptied out.
Other ideas might include asking the state’s universities and colleges to accept less than full price from contract holders given that fewer students these days pay the “sticker price” for college after discounts and grants.
That clearly won’t be appealing to university presidents who have had to lay off personnel to cope with the loss of state support.
None of the choices is obvious. And all carry risks. Just what a bumbling state government needs.