Despite Losses, Experts Push College Savings Plans

By Staff
June 2, 2009

Although many college savings plans have significantly decreased in value this past year, financial experts are still advising families to invest in 529 college savings plans.

Among the college investments hit hardest this past year include savings plans in Oregon, Pennsylvania and Alabama, notes U.S. News & World Report. Oregon's "Conservative" 529 plan lost more than 30 percent of its value in one year because some of the funds were placed in derivatives, and Pennsylvania's "guaranteed" college savings plan--which promised that contributions would grow at the same rate as tuition--lost so much money that it will only pay college bills for the next eight years. Similarly, Alabama's Prepaid Affordable College Tuition program, which allowed parents to pay and lock in tuition many years in advance, announced that it could only cover students' tuition for the coming academic year.

Consequently, investors have decreased college contributions. The 529 industry reported that it netted $1.6 billion in the first quarter of 2009, while a year ago it was $2.1 billion. Moreover, according to a recent national survey by Gallup and Sallie Mae, 48 percent of parents of college-bound students have responded to the recession by decreasing college savings or cutting it out entirely.

But financial experts agree that a 529 college savings plan is far superior to savings, money market accounts and CDs. Indeed, some point out that the industry has done a poor job of letting investors know that most 529 plans offer lower-risk investment options.

"If, in fact, so many people are choosing money markets outside of 529 vehicles, they clearly don't know they exist within 529 plans," said Andrea Feirstein, managing member of New York-based AKF Consulting, who was quoted in The Wall Street Journal.

U.S. News & World Report notes that new legislation is being pushed to protect investors. Feirstein, who was also quoted in U.S. News, noted that many states are making college investments safer. At least six states now offer FDIC-insured savings options, while Utah and Wisconsin launched new guaranteed plans this past year.

Additionally, Rep. Earl Pomeroy, a Democrat from North Dakota, has introduced a law that will give federal tax credits to low- and middle-income families who save for college. He remarked that the significant college savings losses have "made us sadder but wiser investors. But the answer is not to forget about savings. It is more important than ever."

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