Actuarial Issues in Prepaid Tuition Contracts

In 1987 Wyoming became the first state to sell contracts which promised to provide tuition in the future. Although such contracts had previously been sold by individual postsecondary schools, there had not been any widespread success in marketing these contracts. Although less than 1,000 contracts have been sold by Wyoming, several other states have begun selling such contracts and the amount of revenues collected from these contracts and the future benefits promised by these contracts have become substantial. Because these contracts provide a benefit whose dollar value is uncertain at the time of sale, and because the contract prices are fixed at the time of sale, these contracts contain significant risks to the states and create a difficult challenge to the actuaries who opine on the adequacy of the trust funds to provide the benefits promised by these contracts. This article discusses some of the implications and possible results of the method currently used by the major states to project tuition inflation - use of a level inflation rate in all future years. In addition, other possible methods of projecting tuition inflation are described - use of autoregressive techniques, use of economic scenarios and use of an econometric model. Addressed briefly are issues relating to adverse selection when tuition rates vary within a state and issues relating to investment strategy.