Last Updated May 11, 2009 5:39 PM EDT
It's easy to finger the stock market as the fall guy for the 529 college plan debacle. I'd suggest, however, that Wall Street isn't the worst culprit. To understand why, you have to look back at least a quarter century.
It was during this era that college rankings were trotted out to sell magazines. Schools eventually concluded that it was going to take obscene amounts of money (much of it coming from parents) if they hoped to inch up U.S. News & World Reports' rankings ladder. This led to all sorts of cynical higher ed behaviors that included constructing ever more fabulous (and expensive) buildings to win over impressionable teenagers.
At the same time that schools started behaving like beauty contestants, states began balking about adequately funding their public universities. Shrinking state revenue mixed with anti-tax movements led to rising tuitions - a real nonstarter for parents.
Rather than dropping out of the admissions arms race, politicians helped the higher ed world find a way to reduce parents' anxieties inexpensively. In a fascinating commentary in The Chronicle of Higher Education, Kevin Carey, who is policy director at the Education Sector, an independent think tank, suggested that politicians took the easy way out by launching 529 plans.
The 529 plan, with its tax advantages, were supposed to appease families who couldn't fathom paying more for a college education than their homes. With the imprimatur of state governments, families believed 529 plans were safe and invested in them the same way they would retirement accounts. But the time horizon for college is shorter and unlike workers, who can postpone retirement during tumultuous markets, families with 19-year-olds can't.
Carey argues that state and federal governments should regulate and subsidize public universities to keep tuition affordable for middle-class families and provide adequate need-based aid for lower-income students. But he acknowledges that it's unlikely to happen:
I wish it wasn't true.
"That costs more time, money and political capital than policy makers have been willing to spend. So we end up with a witches' brew of uncoordinated and inefficient grants, subsidies, and tax breaks - to which new ingredients are added by the year. Instead of raising enough tax revenue and holding institutions accountable for spending money effectively, policy makers are constantly searching for the next free dollar and sound-bite affordability plan."