529s: A Bad Gamble

[sewall]

Or so says an article in The Chronicle of Higher Education. I don't see much new in it. It is merely a warning about the riskiness of stocks for shorter-term investment.

The article is only available online without a subscription for a few days.

I think the following is the heart of the argument.

We were all so comfortable with the conventional wisdom of investing for retirement — "buy and hold," "save for the long term" — that nobody bothered to note a couple of things that are obvious in retrospect. First, saving for college isn't like saving for retirement. The run-up is much shorter, 18 years at most instead of 30 or 40, so most of the miraculous gains of compound interest are lost. Second, the payout is far more immediate and inflexible. People can choose when to retire, delay if they have to, and ride out ups and down in the market over decades. For most students, college happens three months after graduation, ready or not, and the check is due on Day 1.

[Tramper Al]

I don't see much new in it. It is merely a warning about the riskiness of stocks for shorter-term investment.

This bit is new to me, and somewhat disturbing:

In some states, parents who went with prepaid-tuition plans (another type of 529) are discovering that the promise — pay tuition at current rates now and avoid increases in the future — is no guarantee. Having lost nearly half its money in the market, Alabama's plan sent parents a letter noting that it has no "legal or moral obligation to ensure the ultimate payout," i.e., pay for college.

[ualdriver]

That's the risk one takes when buying a pre-paid tuition contract...


In 2002, the combination of rising college costs and the prolonged 2000-02 bear market forced the Colorado Prepaid Tuition Fund to close its doors to new contributions. The plan gave current participants the choice of either withdrawing a full refund of the money they had invested so far or earning a maximum return of 5.5% in each coming year, regardless of how high college costs rose.

from http://finance.yahoo.com/news/Are-529-P ... 08366.html

[polaar]

A 529 can be a good tool for college savings. You can get a state tax deduction for your contributions in many states (in MI it is up to $10,000), the money grows and is withdrawn tax-free. One is free to choose more conservative allocations with fewer equities if one does not want to fully take on that risk.

[aainvestor]

That's the risk one takes when buying a pre-paid tuition contract...


In 2002, the combination of rising college costs and the prolonged 2000-02 bear market forced the Colorado Prepaid Tuition Fund to close its doors to new contributions. The plan gave current participants the choice of either withdrawing a full refund of the money they had invested so far or earning a maximum return of 5.5% in each coming year, regardless of how high college costs rose.

from http://finance.yahoo.com/news/Are-529-P ... 08366.html

I'm glad I am in Virginia. I know it can change but they have closed the prepaid before, and raised entrance prices for new contracts but they still stand by the guarentee:

State legislation provides a financial guarantee in each year's state budget to cover VPEP's contractual obligations in the event of a funding shortfall. This provision can only be changed by the Virginia General Assembly, subject to the Governor's veto, and the General Assembly's ability to override a veto.

http://www.virginia529.com/SavOptVPEPGuarantee.asp

With the number of contracts out there, voting that way is close to political suicide.

F-

[ualdriver]

I'm glad I am in Virginia. I know it can change but they have closed the prepaid before, and raised entrance prices for new contracts but they still stand by the guarentee:

F-

Yup, that's a nice guarantee. I wish we had that in IL for my prepaid contract.

[HardKnocker]

I've never felt comfortable with 529s.