Managing college tuition inflation using a surplus framework methodology

Abstract

This paper explores prepaid college tuition plans and develops a methodology for managing college tuition inflation. A surplus framework methodology is derived that employs various securities and incorporates both the assets and liabilities associated with prepaid college tuition plans. Although we present a methodology for plan management, the approach is applicable for individuals who manage their own college investment accounts. An interesting result of this analysis is that U.S. Treasury inflation-indexed securities should be included in the asset allocation decision for college tuition inflation management. By incorporating both the assets and liabilities from the plans into a surplus framework methodology, this paper provides a new portfolio management tool for plan administrators and individuals. Our assertion is that better managed plans offer more college financing alternatives for individuals. © 1999 Elsevier Science Inc. All rights reserved.