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Makin' Money

Rolling the dice and 529 college savings plans

Chris Farrell Mar 8, 2011

Here’s a sobering figure: College costs have soared by 82% over the past decade. State governments have been reducing their support of higher education. Families are left to try and pay the ballooning bill by saving more, many through tax-advantaged 529 college savings plans.

But too many 529 college savings plans rely on a stock market roll of the dice. The luck of timing makes a huge difference, according to a recent report by the Education Sector, an independent research group.

In other words, for parent’s struggling to invest hard-earned money in a typical 529 savings plans it’s far more important when their child enters college than how much has been saved. It isn’t right.

The report relies on historic simulations since 529 savings plans have been in use nationwide only since 2001. Still, it’s a thoughtful exercise that is a valuable reminder: Stocks are risky. For instance, let’s say two different parents save the same dollar amount every year into a 529 plan. The dice came up right for the student that entered a public college in 1997. The 529 savings could have paid for as much as 4.27 years of college. In sharp contrast, a student entering college in 2008 would have had enough to pay for less than a year–0.72 years to be exact. The figures for private colleges show a similar pattern.

The message in the numbers isn’t to stop saving for college with 529s. The cost of college is going up and a 529 is a highly tax-advantaged savings plan. But not all 529s are the same. First of all, scrutinize fees. Secondly, stick with more conservative investment choices. Third, it’s best to have most if not all the savings in cash as the first tuition bills looms.

There’s another takeaway from the report: Far too many states have allowed for 529 plan designs that benefit the financial services industry more than their savers. It’s wrong.

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