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With the revelation that its prepaid tuition program is dreadfully underfunded, Illinois joined a long list of states that have struggled with similar plans.

College Illinois, one of two types of savings plans offered by the state, is $560 million short of its projected obligations to nearly 54,000 current and future students, according to a recent audit. The program allows parents to lock in today's tuition rates, boosting their ability to pay for college.

But after promising more than it can deliver, the plan — like many across the country — has been closed to new investors while lawmakers and plan managers decide how to save it.

Gov. Pat Quinn has named a new chairwoman to oversee the Illinois Student Assistance Commission, which controls the fund. The Legislature set up a task force to examine it. And there are calls for greater transparency, with critics questioning investment strategies.

"We've stopped the bleeding at this point," said Rep. Jim Durkin, R-Western Springs, chairman of the College Illinois Recovery Taskforce, which has had a pair of public hearings delving into the plan's troubles.

According to the recent audit, the troubled fund has $1.29 billion in assets, enough to cover roughly 70 percent of its financial obligations, as of March 31, 2011. The situation will grow worse, however, if the fund remains closed to new investors. Without an infusion of money from contract sales, the deficit will grow to $1.6 billion from 2022 to 2036, according to the audit.

HOW IT WORKS

College Illinois is what's known as a 529 plan, established in 1997 by the state Legislature in an effort to help parents with rising college costs. There are two types of 529 plans, drawing their names and tax exempt status from the section of the Internal Revenue Code that regulates them.

One is a savings option that works like a 401(k) plan, with parents contributing money that is invested by plan managers. Many states also offer tax breaks and other incentives to encourage investment. Later, the money can be withdrawn and used for a wide range of college costs. Both Illinois and Missouri have them, calling them Bright Start and MOST.

Then there are the prepaid tuition plans like College Illinois, in which parents buy tuition credits at a slight premium over current rates. Those credits are used years later when their children go to college.

Things get tricky when fund investments fail to keep pace with rising tuition costs. Some states — Florida and Mississippi, for example — guarantee they will support their funds if they run into trouble. Most, however, are like Illinois, which offers no such promise.

While both plan types were enabled by the same federal legislation, the savings option has turned out to be far more popular and less troublesome than the prepaid tuition plans. Across 48 states, parents and relatives have invested $133 billion in savings plans as of September 2011, according to ratings agency Morningstar.

Historically there have been complaints about high fees and poor investment options, but that's been changing in recent years, said Laura Lutton, editorial director for Morningstar's fund research group.

During the agency's last survey of plans, the vast majority were ranked average or better. "We didn't see anything out there that was truly awful," Lutton said.

The prepaid plans are a different story. They are offered in only 19 states and represent just less than $37 billion in investments, according to 2010 statistics collected by the College Savings Plans Network.

They have a long history of turmoil, with College Illinois being just the latest to run into trouble. In fact, nearly half of the nation's plans have been closed to new investors.

HOW IT DOESN'T

To be successful, tuition plans need two things to happen. Investments must perform well, and there can't be any nasty surprises from the realm of tuition hikes. That's why economic downturns can be particularly dangerous for tuition plans, said Joan Marshall, executive director of the College Savings Plans of Maryland.

"You have both of those factors going in the wrong direction," Marshall said.

On the flip side, once the economy improves, the funds can turn around quickly if investments start paying off and colleges ease up on tuition hikes.

Maryland went through its own rough patch in 2002, when a 30 percent increase in state tuition left its prepaid plan only 85 percent funded. Today, the plan sits at 117 percent.

Relying on the economy to set things right, however, may not be enough.

Alabama's prepaid plan was crippled by massive market losses in 2008, forcing lawmakers to pour more than $500 million into the fund to keep it running. But even with that support, the state ended up closing the plan after another round of losses put it in jeopardy once again.

Texas closed its first prepaid plan after it was hammered by skyrocketing tuition costs. The state later opened a second plan, but this time it shifted the risk to the state universities.

In the new version — considered by some to be a model for the future — parents buy tuition units, which the schools must accept, even if the fund's investments do poorly.

Other states have taken less-severe measures, relying on new customers to help repair the damage, said Joseph Hurley, founder of Savingforcollege.com, a website dedicated to 529 plans.

"A lot of these places have jacked up their rates to well over the current tuition prices," Hurley said.

'WHAT DO YOU DO?'

Illinois officials have yet to settle on any particular strategy, but they insist they want to see the plan reopened eventually.

John Samuels, spokesman for the student commission, said the group plans to look at several options during its late January board meeting and hopes to have a solution, approved by the governor and Legislature, in place by June.

At present, he said, the tuition program is operating as normal.

"The program has never missed a payment. Never been late with a payment," Samuels said.

Particularly troubling for the state is the question of its own financial obligation to the fund. From a purely legal perspective, it appears the state isn't on the hook for anything.

But Durkin, chairman of the Recovery Taskforce, shares the concerns of those who say the fund was marketed as a safe investment, backed by the state. His family is among the 35,000 who have tuition contracts.

He's still hopeful the Legislature, the student commission and the state's schools will be able to work together to fix the broken fund. But if that doesn't work, he said the state will need to consider helping out.

"There will be a discussion about the state's obligation to the fund, based on the way it was marketed," Durkin said. "I hope we don't get to that point."

None of this, however, is particularly comforting to Sarah Antonacci, a Springfield, Ill., parent with prepaid tuition contracts for three children. She and her husband started paying for their first contract when their oldest daughter was 1 year old. They finished paying for it the same month they learned about the plan's troubles.

"We were floored," said Antonacci, who chose College Illinois because it seemed the safest investment.

Now they're hearing stories of people pulling their money out of the fund, which offers a scant 2 percent rate of return on withdrawals. But while they worry about the possibility of losing the money they've already invested, they also realize the $24,000 they spent on their first child's contract wouldn't even cover one year at the University of Illinois at Urbana-Champaign.

"You're this far into it, what do you do?" Antonacci said.