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College Illinois! prepaid tuition – risky investments or Illinois Ponzi scheme?

All new investments for the College Illinois! prepaid tuition program have been suspended by the state agency running the program due to an increasing scrutiny concerning risky investments of the money that people have invested for their children’s future college tuition.

In a previous post , it was shown how the State University Retirement System was making risky investments to make up for losses in the market and underfunding by the state at 43%. Now, the Illinois Student Assisstance Commission (ISAC) is confronting mounting questions about their unconventional investment strategies for the fund that supports the college savings of 55,000 students.

The plan is 31% underfunded when assets are compared to long term liabilities to generate enough funds to cover the students when they reach college age. So the ISAC is investing in risky private equity, hedge funds, and other alternatives to stocks and bonds.

Excerpt:

State lawmakers say they have been receiving calls from plan investors worried because there’s no state guarantee to make good on their contracts if the fund’s money runs out before their children enroll in college.

The order to stop the ISAC from new investments stopped a $50M investment, unanimously approved by the ISAC, in an untested hedge fund that didn’t have any other investors except College Illinois! at the time.

House Speaker Madigan, in a bipartisan manner with Jim Durkin, R-Orland Park wants a state probe of the program. The Illinois Auditor General’s office has been asked to investigate not only the investment strategies of ISAC but the agency’s administration’s costs.

The program currently has a $300M shortfall and some of the general assembly thinks that the state of Illinois should bail out the program for the current or future 55,000 college students.

A spokeman for ISAC said, that on page 14 of the contract that the parents have signed clearly shows that there is no guarantee that the money will be there and that the Illinois General Assembly is not obligated to pay off the college loans if the money is not available. So are the investments by thousands of Illinois families a new gambling strategy where parents risk savings to obtain affordable college tuition, or a new Ponzi scheme?

Excerpt:

A spokesman for ISAC blamed the shortfall on two factors above all others. He cited the general collapse of the investment market.

Nearly as important, the commission grossly underestimated future tuition increases at state colleges. As late as 2006, a family could pay $41,000 to purchase four years of tuition at the University of Illinois at Urbana-Champaign. Now, ISAC charges more than double that amount, $95,500, for four years of prepaid tuition.

Despite the harsh criticism of the ISAC’s management and investment principals, ISAC continues to market and accept new investors into its College Illinois! prepaid tuition program. Their new brochures handed out do not mention the 30% underfunding, risky investments or that the tuitions are not state guaranteed, as they did five years ago.

It’s also similar to a Ponzi scheme in that anyone buying new contracts will be charged an inflated price to help pay down the obligations to others who invested at a discount rate in prior years.

Friday, April 15, the Illinois House approved a resolution 114-0 that calls for an audit of the CollegeIllinois! prepaid tuition program and to investigate that 38% of the new investments have been in “risky” alternatives such as hedge funds, real estate and private equity investments.

Just out today in Chicago Business, ISAC has paid out of the College Illinois! plan increases in salary and benefits to its employees saying that the investors (the parents) have been undercharged since the program was launched. Investors were subsidized by income from ISAC’s student loans which it sold in 2007.

Exceprt:

The Illinois Student Assistance Commission paid $3.35 million in salary and benefits to employees who work on the college savings plan, up 75% from $1.86 million in 2009, and nearly four times the $841,816 paid in 2008.

ISAC has also hired a private marketing firm to boost sales of the plan – have to cover those earlier investors – where have we heard this before?

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6 Comments

  1. I never liked these college savings plans. Entice working people into saving for college by offering tax deductions, layer the savings with limitations and bureaucracy, make fat cats even fatter, and screw the commoners in the end.

    How about just allowing people to decide to do whatever they want to with their money, cut government spending, and cut out 80% of the tax code (taxes, credits, deductions, everything!)

  2. Ted,

    On a side note, I would like to see a blog on the IL use tax. Here is a good place to start.
    http://chicagoist.com/2011/01/08/the_bad_math_of_the_amazon_tax.php

    There is also another question as to the constitutionality of the tax since it also taxes goods from foreign countries which is contrary to the law in the U.S. constitution.

  3. That increase in the amount that the fund now charges, do you think that financial wizard Alexi G had anything to do with that? Have to make-up those investment losses somehow.

    Also, the cost of tution keeps outpacing inflation due to the fact the college tution is over-subsidized by the gov’t. The more you subsidize something, the greater the demand for the product. If the product has a very high barrier of entry, as does college education (you can’t build a college overnight), then the current supply will have to meet that increased demand. Any Econ101 student will tell you, when you have increased demand and stagnant supply, the prices increase.

  4. Ted Biondo

    I think Alex was somewhere making these brilliant decisions about the investments. Someone must have had a hand in four of the five retirement funds because they all are underfunded, with the exception of the IMRF, and all are using risky investments to try to catch up to their underfunding.

  5. Ron dinwiddie

    WHY ISN’T THE PRESS ALL OVER THIS DISASTER- TRIBUNE AND SUN-TIMES?

    CHRISTOPHER KENNEDY IS CHAIRMAN OF U OF ILLINOIS BOARD: WHAT DOES HE HAVE TO SAY ABOUT THIS MISTRUST OF THE PUBLIC AND HOW HE PLANS TO FIX AND GUARANTEE THIS PLAN MAKE GOOD ON ITS “TRUTH IN MARKETING” TO LOCK IN THE TUITION AT TIME OF INCEPTION?

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