Do 529 Plans Favor the Fortunate?

Last night, a friend was asking me about education for his young sons, and how much he should be saving. The discussion was spurred on by an article he read in the Pittsburgh Post Gazette.

web-book-open-(1).jpgThe piece was based on a recent study by “Education Sector“, a DC think tank.

In it, they analyzed what would happen to a family that saved $1,000 a year, for 18 years, when it came time to pay for college. Below, you can review how many years of education could have been saved if your child happened to turn 18 in each year.

Because only the years 1996 and 1997 fully funded 4 years of a public education, the authors conclude that “529 plans favor the lucky.”

By saying that those who were born in 1978 and 1979 were “lucky”, and everyone else was just gambling with their savings misses the point. In my view, you can’t expect $1,000 in annual savings to grow fast enough to pay for college over 18 years.

Take my daughter for example. She turned 3 years old this spring, and we have been saving for her education since she was born.

In 15 years, she will be graduating high school, and presumably off to college. If she stays in state and goes to West Virginia University, the current “all in” estimate for a current student is nearly $17,000. If that cost goes up by 6% a year, a 4 year degree would run more than $194,000!

If I do what the study says, and save $1,000 annually, my total savings will only amount to $18,000. Assuming a growth rate of 8%, my 529 plan will grow to $37,450.

Should I expect luck to make up the $176,000 difference?

Of course not. But for one reason or another, the authors chose to blame timing and the 529 plan itself for parents not being able to fully fund a college education on $1,000 a year.