Parents Saving More for College, States Saving Less

Americans are putting more money into government-sponsored 529 plans, the investment plans that allow families to save for future higher education expenses for children. Investment in these plans has increased 75 percent in the last two years.

According to an article by Walter Hamilton in the Los Angeles Times:

U.S. families poured a net $9 billion into 529 plans last year, up from $5.1 billion in 2008, and the pace accelerated in the first quarter of this year, according to Financial Research Corp. in Boston. The annual peak was $13.9 billion in 2006.

Several factors are being credited for the pickup, including improvements in 529 plans and growing confidence in the stock market’s recovery. But experts say the biggest driver is parents’ fear that their children will be priced out of college.

Popular 529 plans allow families to invest their money in a variety to different places, but keep that money free from taxes.

According to the article, families are enthusiastically putting money into 529 plans because they’re worried that they won’t otherwise be able to afford to send their children to college, which keeps getting more expensive.

Despite this, however, it’s not clear that 529 will allow families to pay for college, which is likely to be dramatically more expensive in coming years. In the last five years, tuition and fees have increased 5.9 percent a year at public colleges. Inflation was about 2 percent a year.

During the same period state appropriations per student have declined in 60 percent of states.
Families use 529 plans to try and keep ahead of tuition increases. All that 529 plans allow families to do is invest normally but not pay taxes on those investments. One wonders if forgone revenue from these taxes might have been used to, say, support public colleges.

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Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer