Maryland lawmakers on Wednesday will consider a bill designed to overhaul Maryland 529, the state agency that helps families save for college, by dissolving its independent board and phasing out the prepaid trust it manages, which has been in disarray since it distributed, and then took back, money from thousands of account holders last year.

But the legislation sponsored by state Sen. Joanne Benson, a Democrat from Prince George’s County, among others, doesn’t offer the one thing parents affected by the situation say they want the most — a commitment to pay them back.

“The people who run this agency made a decision, sent us a new contract, and then changed their minds,” said Eric Marshall, a small-business owner and prepaid trust account holder from Clarksburg. “It’s unconscionable. I’m disgusted by it. And it’s time for the legislature to step up and help us fix the problem.”

Marylanders and District of Columbia residents hold nearly 30,000 prepaid trust accounts, and roughly 1 in 10 are for students enrolled in college this academic year. The trust is a defined benefit college savings plan that allows families to prepay for a student’s college tuition at today’s prices.

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Benson declined to comment on account holders’ calls for relief.

David Schuhlein, a spokesperson for state Senate President Bill Ferguson, said Senate Bill 959 is “not done yet” and “where it stands today isn’t the way it will end up,” hinting that amendments sought by prepaid trust account holders may still be considered.

Parents like Marshall say Maryland 529 violated the terms of their 2021 contract when it removed earnings — worth tens of thousands of dollars in some cases — from their accounts last year. The agency acknowledged in a recent statement that there was “immediate confusion over the meaning” of the contract, but says it remains in compliance, blaming the inflated balances on a calculation error.

One factor that could influence whether families are paid back is the Maryland Prepaid College Trust’s status as a state-backed program. Many frustrated account holders — a group that includes small business owners, state workers and even high-ranking Baltimore officials — say that means lawmakers have an obligation to resolve the problem and pay them back.

But do they?

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This is one of several common questions The Banner explored to help our readers understand the increasingly complex, confusing, troubled state of Maryland’s prepaid college savings program.

Isabel Mercedes Cumming, Baltimore City's Inspector General, sits for a portrait in War Memorial Plaza on Monday, March 13.
Baltimore Inspector General Isabel Cumming said she opened prepaid trust accounts for her sons early in her career because she believed the program’s state-backed status meant her money would be protected. Recently, she was told her earnings are “unavailable.” (Ulysses Muñoz/The Baltimore Banner)

What does it mean for the trust to be state-backed?

When the program first opened for enrollment in 1998, it didn’t have that designation, and participation suffered as a result. One-third of prospective account holders surveyed at the time who declined to sign up cited the lack of a state guarantee as the main reason. Without one, parents had no assurance the money they invested would be there when they sent their children to college.

So, the following year, state lawmakers unveiled a proposal requiring the legislature to cover any shortfalls. But there was one catch. The funding would not be appropriated automatically. Lawmakers would need to vote to fulfill their obligation.

“I firmly believe that if there ever was a financial problem, future legislatures or governors will step up to the plate and honor, if not a statutory commitment, a moral commitment,” former state Sen. Patrick Hogan said at the time. He sponsored the legislation establishing the trust and the bill cementing the guarantee.

Many families bought in.

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Baltimore Inspector General Isabel Mercedes Cumming said she opened prepaid trust accounts for her sons when they were babies and she was a young prosecutor because she wanted to help them pay for college and believed the money she invested would be safe. She considered the state-backed guarantee ironclad.

But last year, when she tried to move the balance in one prepaid trust account into the 401k-style investment plan Maryland 529 also oversees, a common practice called a rollover, she was told she could only access her principal, not the earnings her account had accrued in the two decades since she joined the program.

Instead of moving more than $43,000 into the investment plan like she expected, agency staff told her she could only move $15,000. Her earnings, the agency said, were “unavailable.”

“I’m really scared that we’re never going to see that money again,” said Cumming, who has spent her career investigating financial crimes. “How could I have been scammed by my own state? The legislature needs to make this right.”

Account holders have always been allowed to join the investment plan by rolling over the principal they paid into the trust plus investment earnings, said Spencer Fell, a former longtime Maryland 529 customer service manager who spoke with reporters last week. He said he now regrets working for a program he believes is “cheating customers out of their benefits.”

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The Maryland 529 board concedes there was immediate confusion about the meaning of a policy change it made in June 2021 that offered account holders some of the trust’s surplus funds. But it insists it remains in compliance with that contract. (Paul Newson/The Baltimore Banner)

What did Maryland 529 tell parents who sought clarification on the 2021 policy change?

Plenty of parents didn’t read the fine print when the agency’s board voted in June 2021 to approve a new contract that distributed extra money to account holders. Marshall, the Clarksburg father, wasn’t one of them. The small-business owner who previously worked as a financial planner said he immediately understood that the new terms would dramatically boost the value of his accounts.

So in August 2021, he emailed Janaki Kannan, the agency’s chief financial officer at the time, asking her to confirm his understanding of the new contract, which was set to take effect later that fall.

“Will the 6 percent interest on contributions made prior to Nov. 1 begin on Nov. 1, 2021, or will the 6 percent interest rate be used to calculate the minimum benefit beginning from the date of the contributions to the plan?” Marshall wrote.

“The 6 percent interest used to calculate minimum benefits will begin from the date of the contributions to the plan,” Kannan replied.

“In my case, I made contributions to the plan in 2001 and 2002,” Marshall said. “Will the 6 percent be used from then?”

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“If you made contributions to the plan in 2001 and 2002, the 6 percent interest will be used to calculate the minimum benefits from that time,” she told him.

Marshall said Kannan couldn’t have been clearer about the intent of the policy change and how the earnings would be calculated. When he received his annual statement in December 2021, he believed his accounts were valued at just over $91,000. Now, the agency says they’re worth less than half as much — and he’s furious.

“My theory is they made this change, realized after the fact just how lucrative it would be for account holders, and then took it back,” Marshall said. “How is that legal?”

Earlier this month, the Maryland 529 board issued a rare public statement on the earnings calculation issue that directly contradicts what Kannan told Marshall a year-and-a-half ago.

“It was never the intent of the board, and in fact the board itself did not vote to apply the earnings to all contributions and all amounts, but only to balances as of Oct. 21, 2021,” the board wrote in its March 2 statement.

Marshall thinks he would have a strong case if he took Maryland 529 to court for breaching his contract. But he doesn’t intend to because relief would take too long to secure. His son is a senior at Towson University and his daughter is a junior at the University of Maryland College Park. He needs his earnings restored now.

“That’s why we need the legislature to help us,” he said.

Peter DeFries of White Hall says the problems with his prepaid trust accounts have been stressful for him and traumatizing for his daughter, who is a sophomore at Syracuse University. State lawmakers are now considering legislation that would disband the agency’s board and wind down the trust. (Paul Newson/The Baltimore Banner)

What would Senate Bill 959 do to reform the state’s college savings agency?

Benson’s proposed legislation, which will be considered Wednesday afternoon by members of the Senate Budget and Taxation Committee, has three main goals.

First, it seeks to improve oversight of Maryland 529 by abolishing the independent agency’s board and transferring responsibility for it to the office of state Treasurer Dereck Davis, who said last month he backs the idea.

The measure would also phase out the prepaid trust entirely by preventing families from signing new contracts starting in June and transferring the balances in existing prepaid trust accounts to other qualified state tuition programs by the end of next year. Critically, the bill requires the treasurer to grant interest payments to account holders who leave the trust and join the more traditional state-run investment plan, but demurs on how generous those payments should be, stating instead that the treasurer should determine the appropriate rate through regulations.

And finally, the proposal would establish a workgroup tasked with identifying the practices that led to problems with the trust’s earnings calculation formula in the first place. The workgroup would also be expected to recommend strategies to prevent similar issues in the future and methods to hold accountable the people responsible for causing the problems.

Peter deFries, a prepaid trust account holder from White Hall, said the stress of not knowing just how much money he has to send his children to college is upsetting for him and traumatizing for his daughter, who is a sophomore at Syracuse University. In fact, he said he’s been doubly harmed by this mess.

When he filled out his daughter’s financial aid paperwork, he listed the prepaid trust account balance that included tens of thousands of dollars in earnings that have since been wiped away. Had he submitted the substantially lower account balance he sees now, his family likely would have been offered more generous aid.

“They screwed us on multiple levels,” he said. “Now I want to know who’s going to fix it?”

Jessica Calefati is an education enterprise reporter exploring how Johns Hopkins University is shaping Baltimore’s future.

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