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Making College more Affordable and Accessible: The Evolution of Prepaid529

Mary G. Morris has been the CEO of Virginia529 since 2007. As the former Sr. Assistant Attorney General (1994-1998), she helped create the original Prepaid529 program. Morris served as the Virginia State Treasurer and a Virginia529 Board member from 1999-2002.

Paying for college long has been a challenge for families. That’s why 24 years ago the Virginia General Assembly unanimously passed legislation creating Virginia529, initially tasked with creating a “prepaid” program to help make higher education more affordable and accessible for Virginia families.  With September – national College Savings Month – coming to a close, it is a good time to reflect on the past and future of Virginia529 and its tax advantaged education programs.

On Sept. 14, a guest column ran in the Richmond Times-Dispatch acknowledging that rapidly rising costs has made college more difficult for families to afford. While Virgini529 agrees that the steep price tag of higher education has become an obstacle for families, the column places the lack of affordability of a Prepaid529 contract on pricing policies rather than the rapid increase in tuition and fees at Virginia public universities. Related: Read the Sept. 30 Richmond Times-Dispatch Letter to the Editor “Virginia529 Helps Students Pay for College” by CEO Mary Morris.

Prepaid529 began with a vision to reward and encourage saving with a tax-advantaged and market-risk-free savings vehicle.  Virginia529’s Board, with four state finance and education officials and seven citizen members experienced in finance and education and appointed by the Governor and General Assembly, has effectively administered Prepaid529 through two recessions and significant tuition and fee increases, always aware of its fiduciary obligations to Prepaid529 participants and the Commonwealth.  The Board’s duties require deliberate and conservative management, balancing pricing contracts as low as possible while ensuring Prepaid529’s long-term solvency. 

The primary benefit of a Prepaid529 contract is coverage of full time, in-state, undergraduate tuition and mandatory fees charged to all students at any of Virginia’s fifteen public universities or community colleges.  Those charges are the primary driver of the cost of a Prepaid529 contract.  Other factors play an important role in pricing, including long-term portfolio return and tuition inflation assumptions.  Virginia529 does not assess any fees on Prepaid529 contracts but includes a minor pricing reserve to guard against future adverse experience such as a prolonged recession or extended periods of high tuition inflation. 

Pricing Prepaid529 contracts correctly is important because they are long-term, fixed-price contracts – able to be used up to 30+ years from purchase.  All future risks, including tuition inflation and performance of the fund rests with Virginia529.   Only eleven states still offer prepaid programs, as others closed due to the challenges of pricing and administration in an era of rapidly rising higher education costs.  A discussion currently is ongoing within Virginia529 on Prepaid529 pricing policies and the appropriate pricing reserve at different actuarial funded levels, a discussion prompted by a recommendation from JLARC which provides state legislative oversight. 

Prepaid529 is a defined-benefit program, similar to pension plans, and is reviewed annually by Virginia529’s actuary.  Prepaid529 is considered actuarially sound if actuarially funded at 100 percent, which means there is only a 50-50 chance the program will meet or exceed current obligations.  Prepaid529 ended its last fiscal year 138 percent actuarially funded, which significantly increases that actuarial ratio.   Funded status; however, can change quickly based on market performance and tuition trends,  as seen during the last recession when Prepaid529’s actuarial funded status dropped to 85 percent. 

What has been clear to Virginia529’s Board for a number of years is that because of the steep increase in the cost of higher education since Prepaid529 opened, the cost of contracts is now out of reach for most Virginia families.  A four-year (eight-semester) contract that cost $14,176 for a kindergartner in 1996 cost $67,880 during the last enrollment period – a 478 percent increase.  In 1996, four-year contracts represented over 73 percent of purchases while in 2017-2018 that percentage had dropped below 20 percent.  Interest remains high for Prepaid529; however, the number of semesters purchased each year drops as tuition and fees increase, even as the number of contracts purchased has increased. 

Virginia529, like other state 529 plans, also offers 529 savings programs – including Invest529 and CollegeAmerica.  These two savings programs make Virginia529 the largest and most successful 529 program in the country.  Virginia is one of only two states with both a Morningstar Gold (Invest529) and Silver (CollegeAmerica) rated program – Morningstar’s top rankings.  Morningstar rates 529 savings programs based on five criteria including price, performance and governance.   Virginia529 ranks high in each category. 

Virginia529 opens ten times the number of Invest529 accounts each year as Prepaid529 contracts. Families are looking for programs that are affordable, flexible and easy to use; Virginia529’s board has responded by developing a proposal to make future Prepaid529 accounts more attractive and accessible to Virginia families of all household income levels.  This proposal is under review by the General Assembly.

For over 20 years, hundreds of thousands of Virginia families have trusted Virginia529 with their hopes, dreams and savings. Virginia529 looks forward to continuing to help Virginia families with affordable and accessible 529 programs into the future and to working with legislators next year on improving Prepaid529.

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Devon Copeland

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Phone: 804.225.2452

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