Maryland families who use the state’s prepaid tuition program to save for college will get the generous earnings on plan contributions they’ve been pushing for since the state distributed, and then took back, money from thousands of account holders last year, State Treasurer Dereck Davis announced this week.

State lawmakers earlier this year tapped Davis to manage Maryland 529 — the agency that oversees the Maryland Prepaid College Trust — as well as to investigate the factors that led to the program falling into disarray, and to make recommendations about how to move forward. Davis said he found a series of problems so complex and intertwined that he compared the inquiry to peeling an onion.

“As soon as we believe we understand or resolve one set of problems, we uncover a deeper set beneath it,” Davis wrote in a public letter detailing his findings. “The decisions that I announce today should provide certainty and some sense of relief to account holders and the public about the next chapter.”

Parents who invested in the trust and whose access to their benefits has been in limbo for months, even as college tuition bills came due, called Davis’ decision to set a 6% earnings rate on contributions an overdue victory. Marylanders and District of Columbia residents hold nearly 30,000 of these accounts, and roughly 1 in 10 are for students enrolled in college this academic year.

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To help our readers understand Davis’ announcement, The Baltimore Banner analyzed the 52-page report that accompanies it and summarized some of his findings below.

What is the prepaid trust, and what program changes did Davis announce?

The trust is a defined benefit college savings plan that allows Maryland and D.C. residents to prepay for a student’s college tuition at today’s prices. Plan administrators invest those payments, along with fees they collect from account holders, to grow the fund so it can absorb the cost of any tuition inflation.

The trust is primarily intended to cover the cost of in-state college tuition and fees, along with other qualified higher education expenses, but families may also use their benefits to defray the cost of private or out-of-state tuition. The trust is distinct from Maryland 529′s standard investment plan, the value of which fluctuates with the stock market and is not guaranteed.

Davis settled a debate that has been raging in Maryland for months now: How much do parents’ contributions to prepaid tuition plans earn?

He said payments made before Nov. 1, 2021, qualify for an earnings rate of 6%, compounded monthly. He added that it applies retroactively to the date the contribution was made and will accrue until the benefits are withdrawn or the contract is terminated. Payments made on or after that date qualify for a much lower rate equal to the 10-year Treasury note.

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How will the trust operate going forward?

When state lawmakers appointed Davis to oversee the program, they also voted to phase it out. The window for new families to enroll in the program closed about a month ago. But for the tens of thousands of families grandfathered in, Davis announced another big change. Starting on July 1 next year, old and new contributions will stop earning interest entirely — a move Davis characterized as “getting back to basics.”

He said the shift is necessary to ensure the plan can afford the cost of the retroactive earnings he vowed to pay out. He added that the policy change aligns Maryland with seven other states still offering prepaid tuition plans, whose account holders aren’t entitled to contribution earnings. Only Virginia and Massachusetts offer any rate of return on contract payments that exceed the prepaid tuition defined benefit, Davis noted.

What are program participants saying about Davis’ announcement?

Parents who fought for months to force the state to comply with a program contract they say promised generous earnings are elated.

Brian Savoie, a father who organized more than 1,000 frustrated prepaid trust account holders, said many anxious families thought this day would never come. He credited news organizations including The Banner with helping to assemble “unimpeachable” evidence demonstrating the state owed account holders the extra money Davis has vowed to distribute.

“Today is a day of victory, but a long, overdue day,” Savoie said in a statement. “The Treasurer still has work to do. Now that the decision has been made, swift action is required. In less than 20 days, the vast majority of tuition bills will be due. We have already waited too long for nothing more than what was in our contracts.”

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Davis said the state will prioritize account adjustments for families with students set to attend school this fall. He added that he has communicated with all public and private Maryland colleges and universities to request grace and flexibility as tuition payments come due.

Davis said the state will focus first on adjusting balances for account holders with beneficiaries set to attend school this fall.

What did Davis’ probe of the trust reveal?

Davis found Maryland 529 staff and executives told account holders their contributions would earn 6% interest since the date those payments were made, as The Banner previously reported. “Assurances of this understanding came in the form of phone calls and emails,” Davis wrote.

He also discovered that the agency’s former actuarial firm budgeted for families’ contributions to earn 6% when it calculated the trust’s funded status, a detail that contradicts Maryland 529 leaders’ repeated insistence that a “calculation error” was to blame for the generous earnings the agency distributed, and then took back, from account holders.

Another worrisome finding Davis made concerns the system that the agency used to track its accounts. Banks and investment firms typically use a “ledger system” to track account contributions, earnings and withdrawals in real-time. Instead, agency staff typically calculated account holders’ benefits by hand using a spreadsheet.

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Davis cautioned that he’s still sorting out some of the program’s problems: “We know from experience that there may be other historical issues yet to be unearthed.”