The College Illinois! savings program has been plagued by weak financial controls and conflicts of interest between top administrators and companies hired to invest millions of dollars from the prepaid tuition fund, according to the state auditor general.
The auditor general’s report covers 2006 to 2011, when the commission that oversees the program approved a series of what many considered risky investments — including $12.8 million that went to ShoreBank just two years before the bank collapsed.
The fund also suffered from fast-rising administrative costs, investment returns that fell well short of projections, and college costs that were rising much faster than the cost of inflation, according to Auditor General William G. Holland.
May Not Meet Obligations
College Illinois! is so poorly underfunded the program has stopped enrolling new participants and may not be able to meet its existing obligations. Financial consultant Gabriel Roeder Smith & Co. late last year said the program could go insolvent without a $1.6 billion bailout. With no new College Illinois! contracts, the program’s shortfall will develop between 2022 and 2036 to pay for past contracts coming due.
College Illinois!, like similar programs in other states, was designed to be a “worry-free way to pay for college.” It enabled an estimated 33,000 families to lock in tuition payments for 55,000 future students. But the program was put on hold after audits showed massive shortfalls tied, in part, to declining sales and large tuition increases.
“One of the problems with these prepaid plans is that it is very difficult to catch up if you fall behind,” said Joe Orsolini, president of College Aid Planners, Inc., in Glen Ellyn, Ill. “After the earlier market downturn, they made riskier investments to try to make up the deficit.”
Illinois tops average costs
But the financial market downturn is not solely to blame. College costs nationally have been rising nearly 6% a year for the last four years, while returns on the Dow Jones Industrial Average have been a full percentage point behind, Orsolini said. So even prudent investing would have left fund shortfalls.
And costs at Illinois colleges and universities have climbed faster than the national average. The University of Illinois at Urbana-Champaign is now one of the five most expensive state universities in the nation, and University of Illinois-Chicago is the ninth most expensive, according to Orsolini.
Part of the reason for the big cost increases at University of Illinois campuses was a decision by university trustees several years ago to give four-year tuition guarantees to students who enter as freshmen. Trustees have accelerated tuition increases to cover the guarantees, according to Orsolini.
But underfunding of the program by the state government, failure to adjust to quickly rising college costs, exaggerated expected returns on investments, and poor investment decisions have all contributed to the program’s financial shortfall, according to financial planning experts.
“College savings programs are big business in this country, with more than $130 billion invested as of 2010. The details behind the College Illinois! program are startling to say the least,” said Andrew Schrage, co-owner of Money Crashers, a Chicago-based personal finance site geared to young adults and teens.
‘Damage already done’
“Late last year, the governor of Illinois finally stepped in and replaced the entire oversight committee. But the damage had already been done. There were obvious conflicts of interest from both portfolio managers of the program itself, as well as members of the committee overseeing it.”
Schrage added: “These types of programs can work as long as full disclosure is in place for all portfolio managers and committee members. Also, it seems that if the federal government established a national oversight committee, conflicts of interest would be less prevalent. Whoever is in charge of overseeing these programs needs to insist on getting the details on any proposed investment and vetting the investment for conflicts of interest and level of risk.”
If the state does bail out the program so that it can continue, Schrage recommended administrators lower their promises and expectations for future returns for any new participants. However, with the bad publicity College Illinois! has received as a result of this financial fiasco, Schrage said he has doubts about the program’s ability to attract future participants.