Pay Now, Learn 15 Years Later, Colleges Urge

Sometime in the spring, Randy Dietrich hopes to take out a loan to cover his daughter’s college tuition costs. In the fall, 5-year-old Heather Dietrich will enter the first grade.

Dietrich, laid off not long ago from his Lansing-area construction job, is not just being overly nervous about his child’s future. He is planning to buy into an innovative new state-run pay-now, learn-later scheme that could save Michigan parents thousands of dollars on diplomas for youngsters who have yet to graduate from diapers and cribs.

“I don’t know what college tuition’s going to cost when she finishes high school, and I don’t have the willpower to put the money away by myself,” Dietrich, 30, said. “I’m on unemployment now and just scrimping by, and I don’t want my daughter to have to do that. If I had gone to college, I would have had a better job.”

Part Layaway Plan

Approved last month by the state’s Legislature, the Michigan program--part layaway plan, part mutual fund--offers parents steep tuition discounts if they pay ahead of time. The younger the child, the cheaper the price. The program represents the latest and most sophisticated financial wrinkle at institutions where cash used to grow as lush as the ivy on the walls.

No longer. The Reagan Administration has drastically slashed federal funds for loans and scholarships, the new tax law is expected to put a crimp in charitable contributions to academia and the aging of the baby boom generation portends significantly declining enrollments in coming years.

“Higher education is in a weak market right now, and they’re doing what they can to sell it,” said Richard Anderson, a Columbia University professor who is studying prepaid tuition plans.

Over the last two decades, Anderson said, the average rise in tuitions has outstripped inflation by nearly 50%. The nation’s most prestigious private schools now average annual tuitions of more than $11,000, and the present pace of increases, if not abated, could shoot four-year costs to well over $100,000 by the turn of the century--and that does not include fees, books or accommodations.

Few schools carry price tags quite so lofty, but experts say many facilities--especially private schools catering to largely regional student bodies--fear that high tuitions could further squeeze enrollments and damage the quality of education.

A handful of private institutions such as Pittsburgh’s 4,000-student Duquesne University has already set up prepayment plans designed largely to lure alumni into sending their children back to their alma maters with cut-rate tuition guarantees. The New York-based Fred S. James & Co., a large insurance broker, has gone into the business of marketing such tuition plans and has already signed up Duquesne and 10 other universities and colleges.

Deluge of Inquiries

Meanwhile, Michigan officials have been deluged with inquiries from other states and at least a half-dozen legislatures around the nation are considering similar plans for their state school systems. On Thursday, Assemblyman Tom Hayden (D-Santa Monica), a University of Michigan graduate, introduced a bill to adapt a Michigan-style prepaid tuition program to California’s higher education system.

“Our mission is to provide families not only with a guarantee of tuition but peace of mind,” explained Michigan Treasurer Robert Bowman, chief architect of the state’s program. “Parents will no longer have to turn around as their kids are growing and say: ‘How are we going to pay for this kid?’ ”

Although precise rates have yet to be determined, state officials estimate that an investment of as little as $2,500 on behalf of an infant born in 1987 could buy four years of tuition that might cost $23,000 or more when the child reaches college age in 2005. Randy Dietrich might be able to pay off Heather’s tuition for as little as $3,500. Parents short of cash will be offered the chance to finance the tuition much as they would a car, paying on the installment plan or even through payroll deductions.

Must Meet Requirements

Revenues from the sale of guarantees will be deposited in a large state-administered mutual fund, which will then be tapped to cover tuition payments for participants. As in the case of Duquesne’s program, Michigan students still must meet academic requirements to get into college, though the state will refund slightly more than the original investment if a child does not go.

Around the nation other fiscal experiments also are under way. Many universities now allow students to pay tuition in installments rather than requiring it all up front. Other schools have begun charging different tuitions for different majors, based either on the costs involved in teaching the program or projected earnings of graduates. An engineering curriculum would cost more than liberal arts, for example.

Some marketing schemes seem inspired; others display all the subtlety of K mart “blue light” specials. Programs include:

--The sale of tuition gift certificates, which relatives can buy for their favorite students. Last Christmas, Sangamon State University in Springfield, Ill., did a brisk business in $25 stocking stuffers.

--An anti-dropout plan at Hartwick College in Oneonta, N.Y., in which the college arranges for tuition financing for its students and then forgives a portion of the loan for anyone who graduates.

--A $500 tuition credit for students at Bridgewater College in Bridgewater, Va., who maintain a 3.2 grade point average.

--A New York University offer to match dollar for dollar any state regents scholarship awards granted to its student. Similarly, Bard College in Annandale-on-Hudson, N.Y., will charge the equivalent of the lowest tuition assessed by a public school in the state of applicants who finish in the top 10% of their high school class.

--A bounty program at Neumann College in Aston, Pa., where current students get a 10% tuition break for every new student they bring in.

--Volume discount plans such as one at Barry University in Miami Shores, Fla., where tuition is reduced for relatives who study together.

--Family plans at Pace University in New York, where parents of undergraduates can take courses free if space is available, and at Seton Hill College in Greensburg, Pa., where mothers of graduates get a 50% tuition break if they decide to go to school too. And, in perhaps the ultimate 2-for-1-deal, tiny Lake Erie College in Painesville, Ohio, is offering a special on twins.

‘Matchbook’ Style

“Some of these sound like something you’d see on the back of a matchbook,” sniffed Katherine Hanson, executive director of the Washington-based Consortium on Financing Higher Education, which coordinates fiscal research programs for a small group of Ivy League and other top-of-the-line private schools.

Although some of the tuition plans undoubtedly smack of fiscal gimmickry, the prepaid proposition, which critics and supporters alike have dubbed “tuition futures,” is receiving considerable attention. The idea began with the James brokerage firm, which set up the nation’s first program at Duquesne two years ago. “One family signed up all seven of their children, and some signed them up when they were only a few days old,” said Lois Folino, associate director of the school’s alumni relations office. “They didn’t even have a name for them yet.”

Last year, a four-year guarantee for a newborn was selling at $6,302, just slightly more than Duquesne’s one-year tuition rate for current students of $6,200. For a junior in high school, the four-year price was $20,262. Proceeds from the early tuition pool are invested in U.S. Treasury zero coupon bonds, and James takes a cut of the brokerage commissions.

The school takes some risk because it guarantees tuition for enrollees even if the interest generated on the investments does not cover future tuition charges--projected to be running at about $93,000 for four years by 2004, when the 1986 crop of babies finishes high school.

A much greater risk is assumed by the parents. Although the program guarantees tuition, it does not guarantee admission. Children who do not make the grade or who decide to go to school elsewhere will only be refunded the initial principal on the investment.

“I couldn’t imagine when my kid was born betting where he was going to go to school,” said Robert Atwell, president of the Washington-based American Council on Education, which represents 1,500 public and private universities.

Parents may be coming to that same conclusion. Duquesne sold 482 tuition guarantees for children of alumni in 1985, the first year the deal was offered. Last year, even though the program was opened to offspring of non-alumni as well, the school sold only 100 guarantees.

Verna Hazen, financial aid director at Caltech, said: “It’s not anything we’re doing or I would imagine any other highly selective institutions would do.”

‘Best in Consortium’

Ed Mervine, associate director of financial aid at USC, said: “The problem for a plan like that for an individual school is in assuming a child will meet admission requirements. That kind of plan works best in a consortium or regional plan.”

Michigan believes it will achieve flexibility through just such a plan. Not only can participants use tuition guarantees at any of the state’s 15 public universities and 29 community colleges but they can also tap the program to cover at least part of tuition costs at out-of-state or private schools if they opt not to enter the Michigan system.

Interest in the Michigan program has been so intense that the state has set up a special toll-free hot line to handle inquiries. Bowman said the state may have to use a lottery to limit participants to 5,000 or fewer in the first year until actuaries can determine whether the tuition fund is being financed on a sound basis.

Faces IRS Review

Officials hope they can begin operations by the spring, but the fate of the program still hinges on a review by the Internal Revenue Service. Michigan law bars officials from offering tuition contracts for sale if the IRS determines that purchasers would eventually be taxed on the appreciation, just as stock speculators have to pay a tax on capital gains.

Even in the event of an unfavorable IRS ruling, Bowman is confident that not only can he get lawmakers to give him a new go-ahead for the program but that Michigan parents will still enthusiastically scrounge up the cash to buy into it.

“If they can spend $14,000 on a new car, they can spend $4,000 on their kid’s education,” he insisted. “This is a little more important than a car.”

Times researcher Wendy Leopold contributed to this story.