Hundreds of parents are struggling to access at least a portion of the nest egg they set aside for their kids’ post-secondary education after investing the funds into Maryland 529’s prepaid college plan. Due to a “calculation error,” Maryland 529 froze the additional earnings payments on over 500 accounts this summer, leaving parents scrambling to make tuition payments. But Tuesday at a Senate Budget and Tax Committee hearing, members of the Maryland 529 board said they are confident the error has finally been fixed.

“The additional earnings were a result of an increase to the percentage of attributable earnings that became effective November 1, 2021,” Maryland 529 executive director Anthony Savia said. “The calculation that was used to give the earnings back to account holders was inaccurately reported to them and has been corrected.”

A Maryland 529 account is a state-sponsored investment plan that allows you to invest in a trust to pay exclusively for education expenses. Withdrawals from the plans are tax-free if they’re used for qualified educational purposes. 

Maryland’s 529 program offers two options: There’s a traditional savings plan and a prepaid plan. It’s the prepaid plan, where parents can lock in “tomorrow’s education at today’s tuition,” that is experiencing problems. The prepaid plans differ from a typical checking or savings bank account that earns interest. The contributor pays the cost of college in advance, and the state trust covers the difference when it is time to pay for tuition.

“This is a pre-defined benefit. You purchase a certain number of semesters now for the future,” Savia said. “So I think that’s part of the confusion. People think these are interest-bearing accounts and that’s not what this is. These are not investment accounts.”

Most prepaid plans only cover in-state tuition, but Maryland’s state program allows parents to use the funds for out-of-state schools, too.  

Families using the prepaid plan with students in private schools, out-of-state schools, or if they’re trying to roll over the money into a new account, have been the ones most impacted by this issue. 

In December 2019, an audit was conducted on the trust by The Department of Legislative Services, Office of Legislative Audits. It was determined that the agency needed to convert to a new operating system in order to resolve issues raised in the audit, said  Peter. L. Tsirigotis, former Chair, Maryland 529 Board at a Maryland House Appropriations Meeting last Thursday. To address the problems raised in the audit, Maryland 529 hired Intuition College Savings Solution to streamline their system. He said it was during this transition that the calculation error was found. (Tsirigotis resigned last Friday after the hearing.)

Parents who have contributed to their pre-paid account still have access to it and should be able to view the value of their principal investment, according to Maryland 529. But that has not been the case for all, especially those who are trying to get a refund, use their minimum benefit, or roll over the money into a new account.

“People who are trying to execute that principal rollover, the form will be submitted properly either by the individual or by their new 529 plan. They’ll be submitted properly, and then the forms will get stuck,” Brian Savoie, a parent with a 529 account says. He adds that contributors like himself, aren’t alerted about the forms being stuck and then have to jump through multiple hoops to get their money out of the account.

The value of the contributor’s additional earnings on that initial investment is unclear, and in the summer Maryland 529 suspended additional earnings payments until those values could be corrected. Additional earnings payments are still paused, but at Tuesday’s hearing Geoffrey Newman, interim chair of the Maryland 529 board, said earnings payments are coming soon. And Savia added that manual reports were also on the way, containing transactions from as early as the opening of a person’s account.

“We were told we had over $10,000 in interest in Sarah’s account,” Jane Lehrman, a substitute teacher at Montgomery County Public Schools, says. “I was told that over the phone, like back in the spring. But when you go to the Maryland prepaid, and you actually pull up the statements, there’s nothing about interest.”

Lehrman is the mother of two girls: Sarah, a sophomore at the University of Maryland Baltimore County, and Stephanie, a graduate of the University of Maryland. She says they’re lucky they were able to pay school tuition using their principal investment and not have to rely on extra earnings from their 529 account. But that’s not true for all families.

“The people that really got affected were the people that were told they had all of this interest, and then lo and behold, they didn’t have it,” Lehrman says. “And so are these people who sent their kids to out-of-state schools or may have sent them to private schools.” 

Families are not sitting idle. Parents have rallied together in a Facebook group, Free Our Interest NOW, Maryland529!!!. And at the House hearing last Thursday, they were uniformly dressed in red as a show of action, and in solidarity with representatives providing testimony and recommendations for action to the General Assembly.

Savoie, who represented families at that hearing, said that starting in 2011 he began investing in his son Caleb’s prepaid college plan, making over 125 payments totaling over $57,000 for his son to go to Purdue University.

“I received a statement from Maryland 529 in December 2021 indicating the FAFSA (Free Application for Federal Student Aid)  value on my account was approximately $76,000. I used this number when filling out FAFSA to qualify Caleb for student financial aid,” Savoie said.  

In July 2022, Savoie went to file for his first semester of benefits on Caleb’s behalf and discovered the payments and earnings had been frozen since April of 2022. 

“This was not communicated to account holders until the end of August 2022,” Savoie said. 

Savoie also added that in November 2022, Maryland 529’s Board retroactively changed the disclosure statement back to the amount that was present in November 2021, leaving him with only $59,000.

Savoie said that in comparison, the trust overall has earned significant returns while holding the funds. Newman said that the trust earned a surplus in funds because the state kept tuition and fee increases low over the past several years. He added that since the trust was overfunded, the board decided to share this surplus with account holders – in the form of a 6% earnings increase in November 2021.

However, with the retroactive changes, Savoie said that the nine months of unattributable earnings create a “missing middle” for account holders. 

“The way that Maryland 529 redefined the calculation, it leaves a group of us, I’d say it’s people who have kids in college now and really for people who have kids going into college for like the next three years, it leaves us with almost no earnings on the principle that we’ve put into the fund,” Savoie said.

Savoie said that many parents received written confirmation from Maryland 529’s executive director of their FAFSA value statement in December 2021. Representatives of families said at the hearing say they believe that based on publicly available documents the trust has enough funding to “make them whole” – by honoring the December 2021 statement plus additional earnings and preventing Maryland 529 from a “clawback” in funds they’ve already distributed in error. 

Families are asking Maryland 529 and the Maryland General Assembly to implement a series of measures to enhance oversight, accountability, and transparency in the Maryland Prepaid College Trust.

“We are digging into and continue to assess what exactly happened and making sure that any challenges or miscalculations that we have to have a way of rectifying it,” Maryland Governor Wes Moore said yesterday at a statehouse press conference announcing the new transportation secretary. 

Last Thursday, Maryland 529 shared that they have already manually reviewed 419 accounts out of the 480 that submitted requests. But that doesn’t include families who haven’t submitted a request, or those who may not be aware there is an issue. Overall, approximately 31,000 account holders could be impacted. Maryland 529 has issued an updated statement on their website, saying that manual reviews were still underway and that the current FAFSA values displayed for account holders still needs to be corrected.