Thursday, September 17, 2015

Knowledge is Good

But are 529 plans worth the cost?

Ever have one of those days when you get thinking about something then – WHAM! – someone smarter than you says something smarter than your thoughts? So it was for me yesterday.

In his CNBC article Tom Anderson wrote that assets in Section 529 college saving plans now exceed $250 billion. As I've written before about 401(k) plans, I'm not a fan of investments that require you to go through a middleman. For my family that middleman is the Virginia529 College Savings Plan.

Repackaging low-cost mutual funds from the Vanguard Group, Virginia529 adds 0.15% fee on all investments. The College Savings Plan also shows up as a $400 million "nongeneral fund" item in the Commonwealth's annual budget. (I don't know if the 0.15% fee is the source of that nongeneral fund.)

Then there's the state subsidy: an income tax deduction of $4,000 per account with an unlimited deduction if your over 70. As is the case with all tax deductions, the benefits accrue to higher income households that can afford to save. On top of that it skews tax rates in favor of those claiming the deduction.

Benefits also accrue to plan administrators and state employees who gain employment as middlemen. And as Mr. Anderson pointed out, 529 plans are being pushed as an employee benefit that, in turn, drives up the cost of employment.

Which brings me to smart guy Nick Bunker and his article, "Why U.S. tax credits and tax deductions for higher education don’t work". I'll let you read it yourself but Mr. Bunker concludes, "The reflex among policymakers to reach for the tax code as a means of providing greater access to important goods and services is a behavior they might want to change.

Subsidies drive demand and prices up; higher education is no different. Tax subsidies tilt the playing field toward the affluent. If education helps lift people out of poverty, then delivery of educational programs needs a sharper focus on those who really need help.