MD 529 pre paid tuition debacle

[Anonymous]

This is a long read, but posting for the DCUM readers who may be impacted by the pre-paid tuition issue. One of the parents in the facebook group summarized some of the major issues


Setting the Record Straight on the Maryland 529 Fiasco
 The 529 board and its executives have claimed the reason account holders do not have access to money they were promised is due to an interest rate calculation error that they have now fixed. That is incorrect. The problem is an investment earnings issue and a breach of contract.
 The original contract we signed stated that funds in our accounts could be rolled over to another qualifying plan, and if our contract had been in existence for at least 3 years, the rollover would include "100 percent of the investment earnings"
 For decades, the Prepaid College Trust paid accountholders who wanted to roll over their
money their principal balances plus earnings, often called trust returns. Disclosures from 2016 through 2021 define a trust return: “the since inception rate of return for the
Prepaid College Trust. The date of inception is December 31, 1998, and the since inception rate of return is updated quarterly by the Prepaid College Trust’s investment
advisor. Trust Returns are used to calculate Rollover Distributions and refunds"
 Under Article IX of our contracts, while the board could amend the terms, "the Board will not retroactively modify existing Contract provisions in a manner adverse to
you or your Beneficiary" Yet the board has done just that. First, when it froze rollovers and limited access to our accounts in 2022. And then, according to the manual
calculations distributed to account holders in 2023, it changed the definition of investment earnings to interest earnings, which has a significant and detrimental negative
impact on the value of our accounts.
 Account holders received annual statements on December 31, 2021, that included the “total FAFSA reporting value,” defined as the “refund value” of our accounts. This total tracked with the since inception rate of return as described above, which was about 6 percent. Those documents state that “after 60 days the information will be considered correct and binding for the account.” It is a crime to use false information on FAFSA
forms.
 Parents relied on those 2021 documents, and other corroboration from the trust, to make financial decisions. This was not at all like a banking error that mistakenly inflates the amount you have in your checking account, as Maryland 529 Executive Director Anthony Savia claimed to the state Senate. The FAFSA amounts made mathematical
sense in 2021 and they make sense today. The 529 board has never sent written communications to account holders that the FAFSA numbers were wrong, as required by
our contracts. “The agency did not communicate with the account holders the way they should have,” Savia acknowledged at the Jan. 19 House appropriations briefing.
 Board chairman Peter Tsirigotis, a Greenberg Traurig financial services lawyer, told the House committee that the board’s fiduciary duty was “to the plan.” (He resigned the next day) However, Maryland state law dictates that the 529 board’s fiduciary duty is “solely in the interest of the participants,” a fact that was discussed by board trustees on several occasions in recent years, a review of the board’s minutes show.
 The Prepaid College trust lured account holders into the trust through inaccurate and misleading marketing. For years, it said tuition rates would increase by 6 or 7 percent
every year, even though it knew actual increases were less than half that. “And don’t worry, if Tuition does not rise as projected, you are eligible for a Minimum Benefit equal
to the payments you make plus a reasonable rate of return,” its 2011 brochures stated. This, again, flies in the face of testimony from executive director Savia, who suggested that parents did not know what they were purchasing. “They were never set up as interest
accounts,” he said to the House appropriations committee.
 Executive Director Tony Savia presented a misleading chart to lawmakers in a memo in advance of the Jan. 30 board meeting. The chart purports to show “inflated” account values, but fails to point out that the values include the investment earnings that would be given in a refund, as the fine print on those 2021 FAFSA valuations state. The previous amounts were simply an accounting of the account principal, but not a refund value.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:This is why the prepaid plan shouldn't even exist; it's too complicated with too many variables.

A prepaid plan is like a defined benefit (retirement) plan. Those mostly don't exist, either, and for good reason.

Everyone should just save in a regular 529 and take on the risk of not having enough or having too much when it's time for college.

That's my (probably unpopular) opinion.

Yeah, I looked into several of these when my first was born. The PA one was the best deal, but none of them really made much sense. The returns are very low. The markets would have to have a really bad 18 years for them to make sense. I'm not sure why anyone does them.

People do them because historically it's not hard for state college tuition increases to outpace the stock market, and some people would rather outsource the risk of that happening to the fund manager. The "returns" are directly tied to tuition increases so ex ante it's impossible to know which will be better.

That's the sales pitch, but when you look at the details of the plans they don't really deliver on it. The plans all differ so this is a generalization, but a few things I noticed:
- many of the plans charge more for the credits than the current tuition, so they are baking in some of the return
- the fine print always says that it is not guaranteed by the state and they can lower benefits or impose surcharges/fees/premiums of tuition outpaces expectations or the market underperforms. A bunch of them in fact did this in the 2000s when there were several years of market underperformance.
- many of the plans only cover "tuition," but not fees or room and board. A lot of the state college inflation is naturally in the fees and room and board.
- the best benefit is always for the in-state schools. You can usually use the plans for out of state or private schools, but you get seriously shafted if you do this. Often you just get a return of principal or some very nominal return. If you know for sure that your kid is going to an in-state schools, it can make sense. But you lose a lot of flexibility in college choice.

But with respect to the MD plan a bunch of these don't apply. Although the fees/room and board one is a valid point.

[Anonymous]

Anonymous wrote:This is a long read, but posting for the DCUM readers who may be impacted by the pre-paid tuition issue. One of the parents in the facebook group summarized some of the major issues


Setting the Record Straight on the Maryland 529 Fiasco
 The 529 board and its executives have claimed the reason account holders do not have access to money they were promised is due to an interest rate calculation error that they have now fixed. That is incorrect. The problem is an investment earnings issue and a breach of contract.
 The original contract we signed stated that funds in our accounts could be rolled over to another qualifying plan, and if our contract had been in existence for at least 3 years, the rollover would include "100 percent of the investment earnings"
 For decades, the Prepaid College Trust paid accountholders who wanted to roll over their
money their principal balances plus earnings, often called trust returns. Disclosures from 2016 through 2021 define a trust return: “the since inception rate of return for the
Prepaid College Trust. The date of inception is December 31, 1998, and the since inception rate of return is updated quarterly by the Prepaid College Trust’s investment
advisor. Trust Returns are used to calculate Rollover Distributions and refunds"
 Under Article IX of our contracts, while the board could amend the terms, "the Board will not retroactively modify existing Contract provisions in a manner adverse to
you or your Beneficiary" Yet the board has done just that. First, when it froze rollovers and limited access to our accounts in 2022. And then, according to the manual
calculations distributed to account holders in 2023, it changed the definition of investment earnings to interest earnings, which has a significant and detrimental negative
impact on the value of our accounts.
 Account holders received annual statements on December 31, 2021, that included the “total FAFSA reporting value,” defined as the “refund value” of our accounts. This total tracked with the since inception rate of return as described above, which was about 6 percent. Those documents state that “after 60 days the information will be considered correct and binding for the account.” It is a crime to use false information on FAFSA
forms.
 Parents relied on those 2021 documents, and other corroboration from the trust, to make financial decisions. This was not at all like a banking error that mistakenly inflates the amount you have in your checking account, as Maryland 529 Executive Director Anthony Savia claimed to the state Senate. The FAFSA amounts made mathematical
sense in 2021 and they make sense today. The 529 board has never sent written communications to account holders that the FAFSA numbers were wrong, as required by
our contracts. “The agency did not communicate with the account holders the way they should have,” Savia acknowledged at the Jan. 19 House appropriations briefing.
 Board chairman Peter Tsirigotis, a Greenberg Traurig financial services lawyer, told the House committee that the board’s fiduciary duty was “to the plan.” (He resigned the next day) However, Maryland state law dictates that the 529 board’s fiduciary duty is “solely in the interest of the participants,” a fact that was discussed by board trustees on several occasions in recent years, a review of the board’s minutes show.
 The Prepaid College trust lured account holders into the trust through inaccurate and misleading marketing. For years, it said tuition rates would increase by 6 or 7 percent
every year, even though it knew actual increases were less than half that. “And don’t worry, if Tuition does not rise as projected, you are eligible for a Minimum Benefit equal
to the payments you make plus a reasonable rate of return,” its 2011 brochures stated. This, again, flies in the face of testimony from executive director Savia, who suggested that parents did not know what they were purchasing. “They were never set up as interest
accounts,” he said to the House appropriations committee.
 Executive Director Tony Savia presented a misleading chart to lawmakers in a memo in advance of the Jan. 30 board meeting. The chart purports to show “inflated” account values, but fails to point out that the values include the investment earnings that would be given in a refund, as the fine print on those 2021 FAFSA valuations state. The previous amounts were simply an accounting of the account principal, but not a refund value.

This is useful data. Thanks for posting.

Does anyone know when the “corrected” figures are expected to be available and how much of the earnings are likely to be clawed back as a part of the “adjustment?”

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:This is only pre paid issue for parents who did not go in state so makes no sense to do that.

No, it actually affects everyone. Those who go in-state shouldn't be treated differently than those who go out of state or those who rollover or transfer their prepaid fund.

I agree, it effects all accounts.

Talk about cause and affect.

[Anonymous]

I'm confused-- do we think when all is said and done people will getting more in their account than it says it has currently, or less?

Is the whole issue that they were overstating account values?

[Anonymous]

We are not sure how it will all shake out. They are claiming that there was a miscalculation error but this is untrue. It appears to be a nefarious breach of contract- They previously paid account holders around 5-6 percent interest per year. They then decided that they were no longer going to do this anymore under the guise of a "miscalculation" and are basically giving people no interest at all....even though contractually they are not allowed to do this...so people who have had money sitting in their accounts for 18 years have less money than they put in 18 years ago when fees are taken out. When people last checked their balances prior to the "miscalculation" they had accumulated interest for say 18 years...and now checking currently they have no interest....so some people went from having $100,000 in their accounts to $50,000 in their accounts as an example

[Anonymous]

Ugh.

I got a letter from Maryland below and now have to figure out what the F to do.

Both my kids have traditional 529s and fully paid 4-year UMD prepaids. (Hedging bets on where they go.....)

Kid#1 is a Sophomore
Kid #2 is in 4th grade

Neither have earned income (tho probably #1 this summer) so I am not sure I can roll part into an IRA in their names. I could do one IRA in my name.

Anyone want to chime in on what they are doing???

------------
Dear Maryland Prepaid College Trust Account Holder,

As you may recall, oversight of the Maryland 529 Program, including the Maryland Prepaid College Trust (MPCT), was transferred to my office almost one year ago. Shortly after, I issued a Decision Memorandum which, among other things, outlined the implementation of a four-phase plan. Phase 1 included the issuance of decisions related to certain earnings rates, while Phases 2 and 3 included the required systematic changes to implement the new earnings rates and a legislatively mandated claims process. Phase 4 included the transition to a more traditional defined benefit plan. In the past months, I have communicated with you as we have reached each phase and do so now to announce the upcoming changes associated with completion of the fourth and final phase.

As discussed in last year’s Decision Memorandum, soon all contributions and balances in MPCT accounts will earn zero percent interest. The effective date of this change will be July 16, 2024. This change will bring Maryland in line with many other prepaid plans and align more closely with the General Assembly’s original intent to create a defined benefit plan. It is important to note that while new earnings will not continue to accrue, account holders will retain access to all earnings accrued up until that point.

The MPCT Disclosure Statement Supplement includes necessary updates to the MPCT Disclosure Statement to implement this change. Of course, the decision to continue to participate in the changed plan is yours. This is an important decision, and I urge you to take your time to choose how you wish to move forward. As law changes do not allow for new MPCT accounts to be established, there will be no opportunity to reestablish a MPCT account if you choose to rollover or refund the balance of your account. That said, recent policy changes at the federal level have removed certain barriers that may have previously complicated these decisions, as well as expanded options for rollovers that may be of interest. Specifically, recently issued IRS Notice 2024-23 allows for more than one tax-free rollover for certain affected MPCT account holders through December 31, 2024. Additionally, federal legislation that became effective on January 1 now allows for direct rollovers into Roth IRA accounts, subject to certain limitations.

There are many factors to consider when determining what is best for you and your family and I encourage you to take the time to fully consider your options and to consult a tax advisor before making any decisions. Should you wish to proceed in rolling over part or all of your MPCT funds, please visit maryland529.com to download the appropriate form and to log in to your account. Should you have any questions regarding the rollover process or other account specific questions, please contact the MPCT program manager at [e-mail] or 1-888-4MD-GRAD (1-888-463-4723), Option 2. Additionally, Maryland 529 staff can be reached directly at [e-mail] should you need further assistance.

Kind regards,

Dereck E. Davis
Maryland State Treasurer

[Anonymous]

Makes no sense to get into the prepaid option. No flexibility

[Anonymous]

Anonymous wrote:Makes no sense to get into the prepaid option. No flexibility

Its not about that. Its about what to do now. Getting OUT (not into) makes sense but the question is WHERE to go now? What are viable options?

[Anonymous]

You need to find out what your rollout fogure would be and compare that to weighted average tuition payments you could claim. It might well make sense at least to leave your sophomore’s money in, or it might make sense to leave them both in as a hedge depending on how much you have in the 529.

[Anonymous]

Anonymous wrote:Ugh.

I got a letter from Maryland below and now have to figure out what the F to do.

Both my kids have traditional 529s and fully paid 4-year UMD prepaids. (Hedging bets on where they go.....)

Kid#1 is a Sophomore
Kid #2 is in 4th grade

Neither have earned income (tho probably #1 this summer) so I am not sure I can roll part into an IRA in their names. I could do one IRA in my name.

Anyone want to chime in on what they are doing???

------------
Dear Maryland Prepaid College Trust Account Holder,

As you may recall, oversight of the Maryland 529 Program, including the Maryland Prepaid College Trust (MPCT), was transferred to my office almost one year ago. Shortly after, I issued a Decision Memorandum which, among other things, outlined the implementation of a four-phase plan. Phase 1 included the issuance of decisions related to certain earnings rates, while Phases 2 and 3 included the required systematic changes to implement the new earnings rates and a legislatively mandated claims process. Phase 4 included the transition to a more traditional defined benefit plan. In the past months, I have communicated with you as we have reached each phase and do so now to announce the upcoming changes associated with completion of the fourth and final phase.

As discussed in last year’s Decision Memorandum, soon all contributions and balances in MPCT accounts will earn zero percent interest. The effective date of this change will be July 16, 2024. This change will bring Maryland in line with many other prepaid plans and align more closely with the General Assembly’s original intent to create a defined benefit plan. It is important to note that while new earnings will not continue to accrue, account holders will retain access to all earnings accrued up until that point.

The MPCT Disclosure Statement Supplement includes necessary updates to the MPCT Disclosure Statement to implement this change. Of course, the decision to continue to participate in the changed plan is yours. This is an important decision, and I urge you to take your time to choose how you wish to move forward. As law changes do not allow for new MPCT accounts to be established, there will be no opportunity to reestablish a MPCT account if you choose to rollover or refund the balance of your account. That said, recent policy changes at the federal level have removed certain barriers that may have previously complicated these decisions, as well as expanded options for rollovers that may be of interest. Specifically, recently issued IRS Notice 2024-23 allows for more than one tax-free rollover for certain affected MPCT account holders through December 31, 2024. Additionally, federal legislation that became effective on January 1 now allows for direct rollovers into Roth IRA accounts, subject to certain limitations.

There are many factors to consider when determining what is best for you and your family and I encourage you to take the time to fully consider your options and to consult a tax advisor before making any decisions. Should you wish to proceed in rolling over part or all of your MPCT funds, please visit maryland529.com to download the appropriate form and to log in to your account. Should you have any questions regarding the rollover process or other account specific questions, please contact the MPCT program manager at [e-mail] or 1-888-4MD-GRAD (1-888-463-4723), Option 2. Additionally, Maryland 529 staff can be reached directly at [e-mail] should you need further assistance.

Kind regards,

Dereck E. Davis
Maryland State Treasurer

This information was out there for a year. I rolled over my accounts to MCIP months ago. It was very time consuming.

[Anonymous]

We have 4 years pre-paid with for one kid.

Not sure what we will do. Explain it in plain english - what's the ideal move?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Makes no sense to get into the prepaid option. No flexibility

Its not about that. Its about what to do now. Getting OUT (not into) makes sense but the question is WHERE to go now? What are viable options?

You can rollover into the Maryland College Investment Plan. You’ll have more control and more transparency.

[Anonymous]

Anonymous wrote:We have 4 years pre-paid with for one kid.

Not sure what we will do. Explain it in plain english - what's the ideal move?

I think you are a bit like me - I am the one who posted today and pushed this up again.

Thing is that I was split between 529 and the Prepaid and ESSA. That came for me because I had someone that had a daughter going to college just as 2008 happened. As he said, "I had 4 years saved, now I only have 3." To me it was about balancing risk. (In total, between prepaid, 529 and ESSA - I am sitting on $108K. Pretty well split between prepaid and 529/ESSA. All the while knowing if he didn't go to a public university that I certainly barely have anything saved!)

So the person that suggested leaving the sophomore's money in and moving child #2s money is about right probably for me. He's too close to going to me to want to take on risk. But for #2, she is farther out and I can roll with any bumps that come along.

Plain English is - How far out are you and how much risk you want to take?

[Anonymous]

New poster here. I’m also trying to figure out what to do. DS in 5th grade. I’m thinking I leave the funds in pre-paid plan and hope he goes to a college in MD. If that happens then all is well. I read somewhere that if funds are used for non Maryland college then you get a percentage of the cost of an MD college tuition at that time. Does anyone know how this amount is calculated. It seems we have till December to make a decision.