State College Savings Plans A Big Gamble For Parents

Washington, D.C. — As college costs have continued to rise, states have offered families a way to save for their child’s education. Private savings accounts, known as 529 savings plans, allow a family’s investment to grow tax-free until a child is ready for college.

Yet according to Education Sector Policy Analyst Chad Aldeman in Why 529 College Savings Plans Favor the Fortunate, a new Chart You Can Trust, parents might as well gamble with their college savings. Most state college savings plans are little more than a roll of the dice, Aldeman argues.

Among the key findings:

• College costs have skyrocketed over 80 percent in the last decade. As states decrease their contributions to public universities and colleges, increasingly, families are turning to 529 college savings plans to pay for higher education.
• Today, every state sponsors at least one 529 plan, and families have more than 10 million accounts, assets of which have increased from $14 billion to $135 billion in the last decade.
• Timing is critical for 529 investors. These plans rely on the power of compounding stock market returns to finance higher education. But market rises and falls create huge winners and losers, based solely on luck and timing. (See Chart 1, below).
• Assuming they saved the same amount each year, a student entering public college in 1997 could have paid for as much as 4.27 years of college, while a student entering in 2008 could only afford less than a year.
• Although 529 plans are intended to help all students afford higher education, in reality, wealthy taxpayers are much more likely to benefit. For wealthy families, the tax advantages of financing college expenses through a 529 plan can amount to as much as a 39 percent advantage over a traditional taxable account. For middle income families, that advantage is 35 percent, but for lower-income families it is just 22 percent.

As states decrease their investment in higher education, more of the burden of paying for college will shift to individuals and families. And helping families afford higher education is a worthy public policy goal. But based on the data assembled in this Chart You Can Trust, Aldeman asks whether 529 plans remain the best way to meet that goal.

Read Why 529 College Savings Plans Favor the Fortunate.