NCPA - National Center for Policy Analysis

Losses Hurt College-Savings Plans

January 29, 2002

The popularity of so-called "529" college-saving accounts has been tempered somewhat by the realities of the market. While they offer generous benefits -- the money, when withdrawn to pay for college tuition, is taxed at the student's income tax rate, not the donor's -- the tax benefits don't mean much if the accounts lose money. This is particularly true with 529 portfolios offered in many states that are linked to a child's age.

  • The plans are designed to carry less stock and more bonds each year --making them less risky the closer the student is to entering college.
  • However, by cutting back on stocks in later years, the portfolios have less chance to produce gains if big losses occur in the early years of the account.
  • For example, the Maine portfolio, run by AIM Management Group and targeted for children up to age 3, lost 21.6 percent last year, compared with a negative return for 11.87 percent for the Standard and Poor's 500 stock index.
  • Despite the recent market downturn, 529 plans remain popular, with an estimated $7.1 billion in assets at the end of last year -- more than double the amount of a year earlier.

Still, investors must realize the difference between 529 and retirement plans. The latter are typically held 30 or 40 years, the former only up to 20 years -- so the shorter investment horizon means there is less time for big losses to be erased. Also, there is no standard 529 plan nationwide, and portfolio options differ state to state, even when administered by the same company.

Source: Tom Lauricella and Aaron Lucchetti, "Losses on New College-Saving Plans Sting," Wall Street Journal, January 25, 2002.


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