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College Tuition: The New Gamble

If you have young children, or have given some thought to starting a family, the looming specter of paying for your son or daughter’s college tuition 15 or 18 years down the line no doubt keeps you wide awake some nights. You may have considered putting money into a “529 plan”, an investment vehicle designed to give certain tax advantages for saving for higher education expenses. The NYT has a short piece about one version of these investments, the Private College 529 Plan. The plan offers parents a chance to prepay tuition for their children at a selection of private colleges and universities, at today’s tuition rates:

Here is how the plan works. Families contribute to a trust and get a certificate representing a share of tuition at current rates, a proportion that remains constant even as tuition rises. So, for instance, if you were to pay in $10,000, and the tuition at a given college were $40,000, the certificate you bought would be worth a quarter of one year’s tuition at that college. If, in 10 years, the tuition is $60,000, your certificate would be worth a fourth of that amount, or $15,000. Money must be in the plan for at least three years before it can be used. The plan covers tuition and mandatory fees, but not room and board and other expenses, like books.

Of course, once the child comes of age, he can decide that he doesn’t want to apply to any of the 273 participating schools. In that case, parents can ask for a refund, but they’ll only earn a maximum of 2 percent per year on their savings.

Beyond the risk of a child rejecting his or her parents’ carefully mapped out future (we’re sure this rarely happens), there are other ways this plan is risky, it seems to us. If you buy into the plan, you’re making predictions about the future of education which we would argue are far from a sure thing. Parents are betting that tuition costs will rise faster than the returns on their savings if they had invested them in any number of other options.

Here at Via Meadia, we’ve tried to show that higher education is undergoing a period of rapid change. What colleges will look like 15-20 years from now is anyone’s guess. But with the rise of MOOCs, the decline of state higher ed funding, and increasingly unsustainable student debt burdens, one thing is certain: change is coming.

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  • Mark Michael

    Given the long, long above-inflation increases in college costs (approx. 40 years now?), one has to assume Herb Stein’s famous dictum applies, “An unsustainable trend will not be sustained.” Of course, predicting when that trend changes is a tough thing to do.

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