Maryland parents who invested in state-backed, prepaid college savings plans were thrilled when plan administrators told them two summers ago the fund was flush with cash, and they would all share in the riches. They expected the news meant more money would be available to send their children to college, an opportunity whose costs keep climbing.
But in the 18 months since that celebrated announcement, Maryland 529, the state agency that oversees the Maryland Prepaid College Trust, distributed and then took back the money — tens of thousands of dollars in some cases — sending many parents into a confused rage. 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.
Maryland 529 officials have blamed the inflated balances on a calculation error and said they’re working to correct it. Parents and college finance experts interviewed by The Banner see things differently. They say the state may have violated the terms of a 2021 contract with account holders that promised generous earnings and believe the state could be compelled to pay up to make account holders whole.
Dozens of parents demanding relief testified about the problem Wednesday in Annapolis, telling members of the Senate Education, Energy and the Environment Committee about the lengths they’d gone to cover their children’s college tuition bills amid problems with the trust. Several became emotional as they told lawmakers how they’d reluctantly taken out high-interest loans or pulled money from their retirement savings accounts.
One expert in state-backed college savings plans said she has never seen anything like what’s unfolding now in Maryland.
“I cannot recall a similar situation, where the terms of a contract and subsequent actions present so much confusion,” said Andrea Feirstein, CEO and founder of the AKF Consulting Group, which provides guidance on the college savings industry.
To help our readers better understand this complicated topic, The Banner researched several frequently asked questions about the prepaid trust, the problems account holders have experienced since the state tweaked their contract, and what might happen next.
What is the Maryland Prepaid College Trust?
The trust is a defined benefit college savings plan that allows Maryland and District of Columbia 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, whose value fluctuates with the stock market and is not guaranteed.
The trust is currently valued at $1.1 billion and has a funded status of 140 percent, meaning the trust has 140 percent of the money it needs to pay out its 27,683 account holders’ benefits.
What are the big changes the Maryland 529 board recently made to account holders’ contracts?
In the summer of 2020, the board told account holders the trust had a funded status of 180.9% and planned to “consider a rebate.” In the summer of 2021, the board wrote that it closed the fiscal year with its “highest one-year investment return” of 21.3%. The board then voted to change the contract to distribute some of those extra funds to account holders, an unusual move that’s permitted by state statute.
The new contract stated: “For accounts in existence on Oct. 31, 2021, contributions in your account prior to Oct. 31, 2021 will earn 6 percent on balances, compounded monthly, until benefits are withdrawn. Contributions made on or after Nov. 1, 2021 will accrue regular interest each year, compounded monthly, at a rate equal to the 10-year Treasury note rate.”
Parents whose accounts had been open the longest stood to gain the most, thanks to that compound interest, but all 30,000 account holders stood to benefit somewhat.
Wondering if earnings would really be applied to his accounts retroactively, one parent, who requested anonymity to protect his privacy, wrote to Maryland 529 in August 2021 seeking clarification. A representative wrote back saying, “The 6 percent interest rate used to calculate the Minimum Benefit will be applied since the first contribution.”
He and plenty of other parents thought the matter was settled.
What happened next?
The annual statement account holders received on Dec. 31, 2021 memorialized those lucrative earnings. For example, two plans parent Robert Shaffer of New Market purchased in 2004 and 2007 for his two sons for $92,000 were now valued at nearly $160,000, thanks to the added earnings. But when Shaffer, 55, received his latest annual statement this past December, the earnings had vanished. The section of the document that previously showed the sum of the purchase price plus the earnings had been deleted. His accounts were again valued at $92,000.
“All of a sudden, the benefits they promised us, and gave us, were ripped out from underneath us,” said Shaffer, who works in mortgage lending. “It’s so disheartening. And now, instead of getting answers, we’re getting smoke and mirrors. It’s driving people insane.”
Last month, Shaffer asked Maryland 529 to manually review his account and restore his earnings. However, the paperwork he received back shows the state applied the 6 percent earnings rate starting in November 2021, not on the balances he held before that date, as the 2021 contract seems to require. The Banner reviewed manual calculation paperwork for several parents like Shaffer, and they all show the same thing, with 6% earnings applied after November 2021 — not before.
Shaffer wrote to the agency again earlier this month, asking for relief and demanding a phone call to discuss his case. So far, he says he has not received a response.
What have Maryland 529 officials said about this situation?
A memo summarizing testimony of Executive Director Anthony Savia and interim Board Chair Geoff Newman before two state Senate committees last month describes the source of these money problems as an “automated calculation issue” that has since been resolved. Newman’s predecessor resigned from the board amid the fallout from this situation. The memo also notes that roughly 500 accounts like Shaffer’s have been manually reviewed so far.
When asked by The Banner why Maryland 529 appears to no longer be complying with the terms of the 2021 contract, Savia insisted the agency is following the contract. He wrote:
“Starting Nov. 1, 2021, a 6 percent earnings rate was to be applied on all balances in accounts as of Oct. 31, 2021, with earnings compounded monthly. … The automated recordkeeping system that went live on Nov. 9, 2021 reflected a calculation that applied the 6 percent earnings to all contributions made in the prepaid accounts prior to Nov. 1, 2021, whether benefits had previously been withdrawn or not, and resulted in incorrectly inflated account values that were reported on the 2021 Maryland Prepaid College Trust Annual Statements.”
Savia’s description of what the contract says directly contradicts what many parents believe the contract says, what a Maryland 529 representative told at least one parent who inquired about the contract’s meaning, and the agency’s own actions.
Can the Maryland 529 board really take back earnings? What might happen next?
Feirstein, the college savings consultant, said the legality of the state’s decision to take back money it deposited into parents’ accounts, and the true meaning of the 2021 contract language, will likely be decided in court one day. She also wondered if the board took back earnings after distributing them because it realized the prepaid trust wasn’t as flush with cash as it thought.
“If the plan were compelled to credit accounts with 6% earnings, but does not have sufficient funds to do so, how would account owners be paid?” Feirstein wondered. “This is where the nature of the plan’s obligation becomes important. And, as this information from the plan website shows, in the event of a shortfall in funds to pay benefits, it will be up to the Maryland Legislature to provide funds.”
Parents like Shaffer are hoping state lawmakers force Maryland 529 to honor the account balances shown on their 2021 annual statements. An emergency bill under consideration now would create a work group to investigate the problem and recommend solutions.
Taking the state to court over this would be costly, and likely wouldn’t provide any immediate relief to the roughly 4,000 parents whose children are enrolled in college now. Parents affected by the situation created a Facebook group where they trade ideas and vent their frustrations.
“I feel for these parents,” Feirstein said. “They trusted a state entity to help them save for college, and now many of them feel that trust has been lost.”