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Erin Dillon

The tuition savings gamble

The shift of college costs from states to students carries a big risk for families

By Erin Dillon
April 11, 2011

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STATES LIKE Massachusetts that slash funding for public higher education during recessions and expect families to make up the difference with stock-based savings accounts are subjecting them to unacceptable risk.

It’s a maxim that, in times of economic recession, public colleges and universities get less state financial support. It last happened following the 2001 recession, when per student state funding for public higher education dropped by 17 percent. Funding levels began to inch back up in 2005 but, by the time the latest recession hit, per-student state spending was still 8 percent below 2001 levels. Then, the bottom fell out. Nationally, state spending on higher education dropped 12 percent between 2008 and 2010.

But, unlike families who cope with less income by reducing their spending on non-essentials, colleges and universities are just turning to another revenue source, by asking parents and students to pay higher tuition. Massachusetts provides an excellent example: Between 2003 and 2008, tuition paid by students and parents at public research universities such as UMass Amherst increased by 30 percent. State support increased by just 8 percent. In Massachusetts now, the state covers less than half the cost of educating a student at its public research universities.

This shift of costs from states to students and their families accelerated nationally between 2001 and 2005, when appropriations fell precipitously and tuition rose quickly. Around the same time, states latched onto so-called “529’’ savings plans as a way to encourage families to save more for college. Named after the tax code section that governs them, 529 plans allow parents to put money into managed investment accounts and avoid paying taxes on their gains. Now, every state offers such plans, which are marketed as a safe, conservative way to save for college. Families have gotten the message and opened 10 million accounts over the past decade; those accounts contain $135 billion in assets.

In fact, these plans are not safe. Their viability as a savings option depends on the stock market rising steadily, with few dramatic ups and downs. But that’s not how the stock market works, as we know well from recent experience.

So, by pushing 529 plans, states have not only shifted the cost of college to parents, they’ve also burdened them with significant risks. Consider a Massachusetts family that started putting away the equivalent of $1,000 a year (in 2010 dollars) back in 1980. Over the next two decades, the rise in the value of the Standard and Poor’s 500 Index would have boosted the value of their savings by nearly 300 percent. Times were good, and the S&P had just crossed the 1,000-point barrier for the first time. By 2002, even with the rise in college tuition, that family’s 529 plan would have been worth enough to pay for 3.3 years at UMass Amherst.

But a family that started investing the same amount each month in 1990 would have had a different experience. By the time their son or daughter was ready to enroll at UMass in 2008, the S&P 500 was once again flirting with the 1,000- point mark, this time as the result of falling 20 percent in one year. The value of the family’s savings would have plummeted in late 2008, just as the stock market did, and would have covered only half a year’s tuition. Even if tuition had stayed constant from 1998 to 2008 — instead of doubling — that family’s savings would not have been enough to pay for a single year.

While a worker can put off retirement for a few years to allow his 401(k) to recover, students usually don’t — and probably shouldn’t — put off college in the hopes the stock market will rebound. With less time for parents to save and only a four-year window of time to spend their 529 account funds, families have less flexibility to ride out ups and downs in the market. Instead, they must rely more on the luck of good timing than on careful planning.

As state budgets continue to be squeezed by the recession, policymakers will no doubt push 529 savings plans even harder as a way to offset the rising cost of college. But as the United States continues this slow drift toward financing higher education primarily through personal contributions, we need to have a real debate about whether that’s a good idea. Parents shouldn’t have to gamble with their children’s college educations. Relying on the luck of millions of families is not a strategy for keeping public higher education accessible and affordable.

Erin Dillon is a policy analyst for Education Sector, an independent, non-partisan education policy think tank based in Washington, D.C.

Correction: In an earlier version of this article on college-savings plans, Erin Dillon gave an example of a family saving $1,000 a month. It should have been $1,000 a year.