Saturday, October 25, 2008

529 Plans-The Next Big Problem Area

States have sponsored a variety of 529 plans. The idea was for a parent to pay for college through a tax-free account. The accounts have income tax advantages and provide phenomenal estate tax benefits.

There are two types of accounts. There are prepaid accounts in which a parent buys tuition credits in advance. And, there are savings accounts which are not that distinguishable from regular savings accounts except for the tax benefits.

The savings accounts do not present a problem that could bring down the system because the owners of those accounts take the losses. So if someone invested 50K and has 35K in the account because of market losses, it's a problem for them but not a problem for the system.

The prepaid accounts on the other hand represent a major problem for the universities if that money has been invested in the stock market. Basically, the idea was that the parent would pay the 529 fund 30K and receive tuition at today's price. The idea worked as long as the state's 529 prepaid plan made money on its investments. But it is unlikely that they have made money. So there is likely to be a very large shortfall with respect to what the fund has in the balance and its future committments to pay for college education.

My attitude is that the colleges should just have to swallow the shortfall. But that is my view and is not likely the view of those who will make the decisions.

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