College Illinois, the state’s savings plan designed to allow parents to prepay for future tuition at today's rates, will run out of funds within a decade unless the number of families signing up for the program drastically increases.
Four years after the program was reopened, the 529 savings plan sold 473 new contracts by the end of May when the current sales season ended -- a 27 percent drop from last year’s 646, according to the Illinois Student Assistance Commission (ISAC), which administers College Illinois.
In 2014, the program sold 438 new contracts.
The increase in last year’s sales was due to significant price cuts on contracts, the commission said.
Robert DiMeo, co-founder and managing director of Chicago-based pension consultant DiMeo Schneider & Associates LLC, used the program in the past for his two sons, but says he would be cautious about investing now.
“Certainly when I look at the financial condition of the state and then I think it is widely known that the financial condition of this program is not optimal, yeah I think that would cause a participant or a potential participant to pause,” he said.
The commission says the program needs to sell 1,500 new contracts each year to support future tuition payments.
Selling 500 contracts annually will result in the program running out of money in 2026, forcing lawmakers to grapple with the decision on whether to bailout the program in order to honor the state’s promise to beneficiaries.
The program was halted for more than a year following a 2011 Crain’s investigation that revealed the risky nature of the $1 billion investment fund supporting the program, which relied substantially on hedge funds and other alternative investments.
Contract holders were also reportedly led to believe that the program would automatically be topped off by the state if there was a shortfall. Under current law, the state is not obligated to bailout the program.
“Seven percent is a high return target in today’s return environment, and it really requires positioning a portfolio in a somewhat aggressive and volatile manner; and that can work, but there absolutely are risks,” DiMeo said.
The program also relies on low tuition increases at state universities. Given the state’s current financial problems, higher education institutions may be left with little recourse except to raise tuition costs, possibly jeopardizing the ability of beneficiaries to collect on their investment.