We here at TrustEgg think a lot about 529 plans. And while we have a couple of in-depth posts analyzing 529s on deck, two recent news stories about the uncertainty of 529 plans caught our eye.
There are two basic types of 529 plans: college savings plans and pre-paid tuition plans. College savings plans are simply contributions on behalf of a child invested in some type of savings vehicle, often a mutual fund. Pre-paid tuition plans involve purchasing “units” of tuition at a participating college or university at a certain set price (higher than current tuition), and then using these units to pay for tuition years later when the child enrolls, no matter how much tuition has increased by that time.
The first story is from Kansas, where the governor’s proposed tax plan would eliminate state income tax deductions from the state’s 529 college savings plans. State income tax deductions are one of the major financial incentives for using 529 college savings plans, and ending them could seriously decrease the amount of contributions currently being made by the 60,000 Kansas families using the in-state college savings plans.
The second story involves Illinois‘s pre-paid tuition plans, where the state is currently $560 million short of its projected obligations to pay tuition for 54,000 current and future students. A combination of the economic downturn and unexpected rises in tuition costs have contributed to this shortfall, and the program is currently closed to new investors while the state decides how to address the problem (meanwhile, closing to new investors would seem to exacerbate the problem). While Illinois does not guarantee the pre-paid investments, they have yet to miss a payment, and it remains to be seen how many students, if any, will eventually be affected.
529 plans can provide attractive financial incentives for those families with the savvy to discover them, but it’s becoming increasingly clear that some of these incentives exist only at the whim of state governments, many of which are severely tightening their short-term budgets, to the detriment of long-term programs like 529s. We’ll be back soon with more on 529 plans, and why we think it’s clear the time has come for a new choice in saving for a child’s future.