Kevin Carey takes a look at 529 plans in a recent Chronicle of Higher Education column. He’s skeptical of incentives that primarily benefit the well-to-do. I share that skepticism but in the case of 529s it seems that if they were coupled with (a) some steps and incentives to control college costs (although policymakers need to tread carefully there) and (b) a robust set of direct supports for low-income students you would have a pretty rational “intervention in inverse proportion to need” strategy. 

That said, I have a different concern about 529s. An entire college-cost scare industry has emerged around them with in some cases ridiculous estimates of what it will cost to send your child or children to a four-year state university in say 2025. Ridiculous because our politics simply won’t tolerate some of the higher estimates for potential costs at those schools and there would be policy changes on the financing or cost side as a result. So my concern, apropos of the current fiscal downturn, is that some people are making the decision to save too much for college at the expense of saving for retirement. In other words college savings anxiety could be leading to bad savings decisions. Kevin notes that two-thirds of 529 plans are held by people with a median income of $200,000 annually (I assume that’s family income). But although that’s a comfortable income, and recent Republican assertions that $250K makes you “middle class” were absurd, even at $200K a family with children is still making some choices about savings, especially in more expensive real estate markets and places with higher cost of living and of course absent other streams of income for retirement.

As financial planners are quick point out, funding college at the expense of retirement is a mistake because you can borrow for college but not for retirement. There isn’t good data on this, at least that I’ve found, so the extent of this problem is something of a hunch based on other data points about saving habits as well as the anecdotal things you hear in conversation.  Still, seems worth watching.

One Reply to “529ing”

  1. I have 3 young children, 10, 6, 4, and we are investing in a 529 plan. We are using money that is not allocated toward retirement or savings. We did some shopping for 529 plans before selecting the one we did. I flet the one we chose gave us a long enough term that we would not get caught up in the fluctuating market. Have we lost in the current economic downturn? Yes but so did our retirement, almost 30%. If we put more money in the plan that what is needed or if our kids receive scholarships, it is my understanding that our children will be able to roll it over into an investment plan.

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