I have a lot of conflicted feelings about 529s. Surely there must be a better way for people to save money for college that does not involve handing all your hard-earned cash into the hands of private investment firms that charge in many cases, exorbitant fees that far exceed the meager (state) tax benefit. You have essentially no power over how the money is invested (they are all mutual funds?) and yet…Realistically: What are my other options for saving for college? Three come to mind.
- Savings accounts with .1% interest. Not gonna cut it when the cost of college has risen so dramatically. Have to at least try to beat inflation.
2. Invest the money myself in the stock market. Assuming I make a profit and don’t lose it all (Also a possibility with 529s) I would end up paying 10, 20 percent tax in capital gains. That is a lot.
3. Roth IRA for il bambino, used for educational expenses. Which has to be earned income, so we’ve circled back round to child labor and the early 20th century. Plus, wouldn’t it be better for that Roth IRA to sit for many decades and through the power of compound interest, pay for il bambino’s actual retirement? Future hovercraft rides to the doctor who handles old video game injuries acting up will not be cheap.
Basically, as a middle-class person who does not want their child to enter indentured servitude via college loans, you have to give your money to investment firms who will gamble with that money. In exchange for putting your life savings in their hands, the government generously agrees not to tax you, if you use the money towards qualified educational expenses. And even then, that money might not be enough to cover the rapidly rising cost of college.
How can we not have state-subsidized higher education?* How can people buy into the 529 scam? Because there isn’t really a good alternative.**
*I am looking at you, Baby Boomers. Yes, the people who went to college back when it was state-subsidized, who then took that education and got secure, full-time jobs with guaranteed pensions, who then bought houses that triplicated in value or even more.
**There is another option, the Coverdell Education Savings Account. Used to be called an education IRA, works like an IRA in the sense that you can invest it in what you want, and then you take money out for educational expenses until the age of 30. Can be rolled into a 529. But, contribution limits are 2k a year. Not very much when private college tuition is 70k a year.