Students are facing a crisis
, as they struggle to afford the education they want and need.
But while many focus on the impact of student-loan debt on young
adults, few are looking at the other side of the coin -- namely,
the incentives promoting college savings that in many cases
aren't getting the job done.
The rising cost of college has set off a firestorm of debate.
Skeptics argue that the rising tide of student-loan debt and
ever-increasing tuition costs have reduced the economic benefit
of going to college. And while proponents point to increased pay
after earning a college or graduate degree, others -- including
Fool contributor Brian Stoffel
-- have questioned whether there aren't less expensive ways to
get the knowledge and experience that will help young adults
succeed and prosper in their careers.
But in the ideal situation, students wouldn't have boatloads
of debt to deal with because their parents would have been able
to set aside enough money to cover their college educations. One
vehicle that was established precisely to encourage college
, has seen some trouble attracting savings from some quarters --
and even some of the industry professionals that earn handsome
incomes from such plans are starting to lose interest.
With 529 plans holding billions in assets, it may seem
surprising that some money managers are abandoning the market.
Wall Street Journal
reported over the weekend,
) chose not to keep managing Wisconsin's 529 plans (effective
later this year), and Fidelity made a similar decision with its
Part of the problem comes from the trend toward lower-fee
investments. With index-tracking exchange-traded funds charging
fees that are far less than actively managed mutual funds, the
higher-cost investment options that
) , and other active-management firms have within some 529 plans
come under greater pressure from the state board established to
oversee the plans.
But one clear component of
dissatisfaction with 529 plans
has been the losses that investors have suffered during the
market's volatile stretch since 2008. Unlike retirement savings,
in which many investors have decades to recover from a loss, the
time horizon for college savings is by definition shorter. A
badly timed market downturn can spell disaster for college
savers, and the threat of stock market losses has turned off
potential investors from badly performing 529 plans.
That risk has prompted broader investment offerings from 529
plans, including bank CDs and other fixed-income options.
(Nasdaq: FITB) and some other banks have benefited from increased
CD volume through those offerings, low rates aren't helping
Despite attempts to broaden their investment offerings, 529
plans suffer from the same problem as employer 401(k) retirement
plans: a limited menu of options. Even considering that all 50
states offer at least one 529 plan of their own, none of them
gives you more than a handful of investments to choose from.
The better solution would be to expand another, more flexible
tax-advantaged vehicle that already exists. The Coverdell
Education Savings Account acts like an IRA, letting you invest in
just about anything you want. As long as you use the money for
educational expenses, the income you earn is tax-free when you
take it out. Yet despite allowing people to save hundreds of
thousands of dollars in 529 plans, the annual limit for Coverdell
ESAs is a piddling $2,000 -- and that number is slated to go
to just $500 next year if the bigger contribution limit isn't
529 plans were a good idea for college savings. But it's
increasingly clear that in the tug of war between states trying
to draw revenue from administrative fees and financial companies
trying to maximize their own revenue, the entire purpose of the
plans -- helping people save for a college education -- has been
put on the back burner. Until policymakers remember that purpose,
529 plans may well continue to suffer a decline in interest from
both savers and the financial community.
Investing for the long run demands special attention. The
Motley Fool can help by pointing you in the right direction. Take
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identify smart investments that can help you with all of your
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Fool contributor Dan Caplinger is hedging his bets with a
variety of savings vehicles, including Ohio's 529 plan. He
doesn't own shares of the companies mentioned in this article.
The Motley Fool owns shares of Fifth Third Bancorp and Wells
Fargo, and has created a covered strangle position in Wells
Fargo. Motley Fool newsletter services have recommended buying
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