The College Savings Delusion

While riding Metro home from work last night, I looked up and noticed one of those advertisement placards they run inside the cars, which was promoting the District of Columbia's 529 plan. The slogan was (I may not have the wording exactly right): "Math is complicated. Saving for college is simple." And I got to thinking: Is it? Really?

The ad was clearly aimed at families in the middle class and below, and was meant to appeal to their anxieties about paying for their children's higher education. Such concerns are justified; college is getting more experienced by the year. But let's stop for a moment (or two) to recap why it's so expensive. For the past several decades, the government--primarily states--has been slowly but steadily pulling back from funding higher education at the same time that colleges and universities have been relentlessly raising raising prices and increasing spending. The policymakers in a position to make such decisions don't want to spend more money to fix this problem--they're the same people who decided to pull back funding in the first place. Nor do they want to have a huge fight with the colleges and universities about the relentless tuition increases, because that would be hard. But they still have this problem of families worried about college, and these people are upset, and they vote. So they hit on a solution: more college savings! To sweeten the pot, they throw in a bunch of tax breaks (because spending public money on tax breaks somehow isn't spending public money), which end up primarily benefitting upper-middle class and rich people because they're the people who are actually in a position to worry about big taxes on capital gains and save lots of money in the first place, so it ends up becoming a bonanza for people who don't really need the help, but that's okay, because we're building an ownership society and lower- and middle-class families get a little taste too. As an added bonus, the savings go into the stock market, which allows policymakers to make certain assumptions about yearly returns based on the long-term historical return to the S&P 500 or what have you, which has the effect of essentially creating money out of thin air that can then be applied to the future projections of the ever-rising cost of college, which further relieves policymakers from having to spend actual money addressing said problem, and instead they can spend it on something else, like the [Insert Policymaker's Name Here] Center for the Study of [Insert Policymaker's Name Here], or tax cuts for the rich, or both.

Except it turns out the that stock market is run by liars and thieves who, instead of efficiently allocating capital to productive purposes etc. etc., actually spend their time constructing ever-more-elaborate schemes to defraud the entire world out mind-boggling sums of money. Worse, they turn out to be really stupid thieves who ended up blowing up the entire edifice on their way out the front door with all the money they stole in plain sight of the aforementioned policymakers who were apparently too busy doing things like choosing the font size on the stationery for the Center for The Study etc. to notice. 

As a result, there are now tens of thousands of families across the land with children starting college or in college who would have been better off sticking their money in a mattress than investing in a 529 plan. Heck, they'd have been better off sticking 70 percent of their money in a mattress and spending the other 30 percent on a flat-screen TV and a Wii, because at least that way they'd have a fun way to spend time with their kids during the day while they're not at the job they've just lost and their kids aren't at the college they're not attending because it's too expensive and half their tuition money disappeared in the Wall Street rubble. Meanwhile, the people who run 529 plans have nothing to offer other than utterly senseless comments like this from the p.r. guy in Maryland, who said "We remind people that investments for college are meant to be for the long-term. It's important to stay the course."

And that's whole the problem in a nutshell. Retirement is long-term, in the sense that it happens both in a long time and over a long time. People saving for retirement can afford to ride out ups and downs in the market, and since the goal is to live off the income from your investments and retirement itself lasts (hopefully) for several decades or more, there's also more flexibility to weather a financial storm once you're retired. College, by contrast, is at most a mid-term proposition, eighteen years at the outside. And paying for college is decidedly short-term, since, last I checked, colleges still get paid up-front. 

There's an alternative to all of this: Families pay their fair share of taxes under a reasonably progressive system and policymakers use that money to adequately support higher education and need-based aid while also exercising oversight over colleges and universities that in turn show some restraint in pricing while rejecting enrollment management techniques that direct scarce aid dollars to wealthy students. And when the time comes for people who ride Metro to pay for college, they don't have to worry about astronomical bills or whether their hard-earned money somehow ended up paying for a disgraced trader's second summer house in the Hamptons, because college is affordable.

Simple.