Education plan freezes state tuition

After a year's worth of court battles and rocky times during a recession in the early '90s, the Michigan Education Trust, one of the nation's first pre-paid tuition programs, is aiming to help make college more affordable again.

The state of Michigan began the MET program in 1988, giving Michigan residents the option to pre-purchase undergraduate tuition at lower-than-usual rates.

In 1995, the program was available to Michigan residents for the first time since 1990. But last year it stumbled because of legal trouble, forcing officials to not offer the MET in 1996.

"A lot of concern was tax status," said Kathy Tyson, research and publication manager of the College Savings Plans Network. "Michigan was the first pre-paid education plan started. The IRS said it was a taxable entity. The MET won in the courts when the 6th Circuit ruled in their favor."

Beginning on Tuesday, the MET will once again sell contracts of one to four years, guaranteeing that it will pay tuition for any public college or university in Michigan.

In 1988, Michigan and Florida were the first states to offer pre-paid tuition programs. Today, there are 15 similar programs and eight other states have passed measures to start their own pre-paid programs.

"Forty-two states should have programs by the year 2000," Tyson said. "Michigan served as a model for all states."

MET Director Robin Lott said the program has done well, selling more than 56,000 contracts since 1988 and gaining $7,000,000 in assets.

"To help parents in Michigan save for the future, for their children's educations, the legislature passed the law in 1986 and we had our first open enrollment in 1988," Lott said. "I'd say it's pretty successful. We have 8,100 students benefitting now.

Lott said the MET provides a number of benefits to prospective college students in Michigan. Contracts bought in lump sums later provide money for students to attend any university in the nation, although less money is returned to those who go to out-of-state schools. If a child decides not to enroll at any higher education institution, the invested money may later be withdrawn by the child.

"The advantage is you're paying today's rate and the increases in the future won't matter," Lott said.

Parents pay the average amount of tuition at a state university in Michigan when the contract is purchased, while all mandatory fees are paid by the state later on, regardless of tuition increases.

"My parents paid $8,000 10 years ago and now I don't have to pay tuition," said RC sophomore Sarah McKinney. "It's a good idea to get for children when they're very young, saving you the most money, because you can always get your money back."

Some students say that because MET rewards students for staying in state, it limits their choices.

"It will pay your tuition in state, but if you go out of state it will only pay $3,000," said LSA first-year student Laura Gronseth. "But my college choice was limited."

Although thousands of students benefit from the MET program's guaranteed payments, state Department of Education officials said it's a steal to go to the University of Michigan using a MET fund.

"U of M is the highest-cost school in the state," Lott said. "If you're going to U of M, then it would be a great deal for you because tuition and mandatory fees in-state are $5,878. We price the original contract based on weighted average tuition - about $4,222."

In 1991, state officials temporarily stopped offering MET contracts because returns were too low, and MET became economically unsound. At the time, Gov. John Engler vowed to meet all existing MET contracts.

"From 1988 to 1990, we had a situation where tuition increase assumption was 7.3 percent and the rate of return was 9.75 percent," Lott said. "In 1990, those figures flip flopped. We were only able to get a rate of return of 6.5 percent and tuition increases were up to 8.5. If you can't get the rate of return equal to the tuition increase, it's not right to offer contracts. That's why we offered no contracts from 1991-94."

Eventually, the returns rose after the recession, allowing the MET to offer contracts in 1995, and renew the program this month.

Florida, the other pioneer in pre-paid tuition programs, has not experienced the same financial difficulties Michigan faced in the early 1990s. Boasting the largest program in the nation, Florida's program has enormous assets and far greater returns than Michigan.

Florida officials attribute its success to relatively risk-free investments, having sold 426,000 contracts in 10 years.

"We have an immunized portfolio," said Coleen David, spokesperson for the Florida Pre-Paid College Program. "Our investments are conservative, not risk investments. We are not affected by recessions. We have 12-percent returns with more than $2 billion in assets."

12-05-97