Maybe Obama was right for trying to kill 529 Plans?

I spent last night reading Coming Clean: A Memoir. The author comes from a middle-class family with a lot of challenges. Emerson College here in Boston extracts every possible dollar that she and her family can come up with:

In mid-July, a letter came from the Emerson financial aid department. I had a small trust in my name from an accident I’d had as a child that was set up so that I wouldn’t be able to access the funds until I was twenty-one. But because that trust existed, the school decided that I no longer qualified for financial aid. Without financial aid, I couldn’t go back to Emerson. I couldn’t take out the kinds of loans necessary to pay for the pricey private school. I was majoring in theater, and even at eighteen, I knew that I would never be able to pay back that kind of debt on a waitress’s salary. I called the school and tried to explain, but the financial aid officer professed that until those funds were utilized they wouldn’t be required to give me any need-based aid. But I wouldn’t be able to touch that money until halfway through my senior year of college.

(Translate “financial aid” to “discount off an insanely high list price.”)

It seems that Obama has given up a plan to kill off the 529 college savings plans (nytimes). Aside from further plunging Americans into a tangle of paperwork and government-approved vendors (not just anyone can offer a 529 plan! It has to be a financial institution that is somehow a crony of a state government), I wonder if 529 plans actually help anyone other than colleges. If parents on average save more for college because the government encourages them to set up 529 plans, won’t colleges just raise their prices to absorb the newly available funds?

One of our students at MIT this week provided an illustration of this. He was in a one-year MBA program at MIT. Over the lunch break I said “That’s great compared to the two-year program since you’ll be saving $50,000.” [The real number is $63,750 per year for tuition.] He responded “Actually the price is about the same as for a two-year MBA program.” In other words, the price has no relationship to marginal cost and instead MIT can charge whatever it is worth to the customer (monopoly pricing power ). This led to a group discussion about how a lot of people might be willing to pay the full cost of a two-year MBA program for a two-week MBA and imagine what kinds of profits could be earned from that.

So while it is painful to pay taxes on savings (which is why we should spend all of our money on McMansions and SUVs and let the Chinese do the saving for us), I think Obama may have been on the right track. American’s university system does not need new sources of easy money. Unless we think that the U.S. is spending too little on its higher education system, why does putting money aside to save for college get more favorable tax treatment than putting money aside to save for an investment in a business?

13 thoughts on “Maybe Obama was right for trying to kill 529 Plans?

  1. I’m surprised the one-year MBA is not more expensive than the two-year one, as the university would certainly try to grab some of the student’s surplus from reduced opportunity costs, as any profit-maximizing monopolist would.

    It’s an open question whether it is the health care industry or the educational one which is the most corrupt in this country. In comparison the legal profession, the Military Industrial Complex and telecom/cable duopolies are rank amateurs at the game of rent-extraction.

  2. I have two kids in college and I had (it’s gone now) 529 plan. The college, UMass Lowell, did not take the 529’s money into their financial aid needs. This is because:

    “Be Prepared! … each school can (and most will) set its own rules when handing out its own need-based scholarships, and many schools are starting to adjust awards when they discover 529 accounts in the family” [1]

    Instead of Obama doing away with 529 — I’m not saying 529 is the best thing ever happened for parents / students — he serves us better if he comes clean on the game college are playing and either fix the 529 plan or punishes those colleges that milk it away for their own advantage.


  3. “This led to a group discussion about how a lot of people might be willing to pay the full cost of a two-year MBA program for a two-week MBA and imagine what kinds of profits could be earned from that.”

    Isn’t that basically an “Executive” MBA? It’s not yet down to a two-week seminar/vacation, but it’s getting pretty close. I don’t have any first-hand experience, but the endless ads on subways I see imply it’s about a year of off-on attendance, slightly less than you’d spend in the Army Reserve.

  4. Ivy League (and their close equivalents, e.g. MIT/Stanford/Chicago/Duke) degrees are like high end luxury goods such as Hermes pocketbooks. The supply is carefully (and artificially) limited so that the demand greatly exceeds the supply (each Ivy League spot has 10+ applicants) and so the price can be kept high and ever growing. The number of seats at top schools has not increased in 50+ years despite the fact that the US population has grown in that time and that a higher % want higher education. Here is the graph for MIT:

    You can see that the number of undergrads has not really grown since the end of WWII and in fact declined slightly since the 1970s.

  5. Also like fashion designers, you have your high end couture label (the undergraduate degrees) where quantity is carefully limited and then you have your other brands that cater to a less selective market but allow a little of the couture glamor, but only a little, to rub off (“general studies” programs, aka night school, “Executive” MBAs, online programs, etc.) Not just anyone can walk in off the street and buy the couture product but anyone who is willing to fork up the dough can get in on the other programs.

    Also notable in the graph is the linear growth in graduate programs for the last century, which is about what you would expect given the growth in population and the demand for advanced degrees (and how that contrasts with the total lack of growth in undergrads)

  6. In about ten years, we will get to the point where diplomas are just sold, there will be no pretense about attending classes. In maybe fifteen years, the whole thing will collapse.

  7. Having just filled out the federal financial aid form (FAFSA) that most every school wants you to do, my take away as to the incentives are: max out your retirement accounts, buy the biggest house you can manage, spend everything else. The FAFSA does not take into account retirement accounts or the value of your house.

    We didn’t do that, saved like we thought was the right thing to do so now they think we can pay rack rate. Find a school that wants you to attend so you get a discount.

  8. What would be some of the strategies to fight back the monopoly? For a middle class family who earns good wages through a W-2, I think options are limited. However, for a family who has savings but with low/no income, what would be good strategies?

    Is the value of primary residence part of the consideration? Maybe the right thing to do is to buy a $5m house with all your savings, or a pile of gold bars before the kids apply for college…

    There seem to be an alarming trend in targeting savings lately. 401k and IRA accounts look like easy targets when government look for new revenue.

  9. The same could be said about the mortgage interest deduction. Who benefits? Over time supply and demand has caused the banks to take the deduction into account into the form of a higher interest rate to the borrower.

    Beware of any government actions that can embed in the infrastructure and be impossible to remove.

  10. Robert,

    You asked for a strategy.

    Consider sending your children to a Taiwanese university. Look at the cost:

    compare this to Olin College, link which is one of the few US schools I would recommend young people even bother considering for undergrad.

    The other would be the state-sponsored party school where they should make as high a GPA as possible.

    I have never even gotten a resume listing Emerson College as the Alma mater but I’ve seen several from NTU. In fact, on my floor at work, 6 people or their spouse went there for undergrad. At least your kids would learn Mandarin.

  11. College in Taiwan is not very realistic unless you are a native Chinese speaker. After many years of study, my son is reasonably fluent in Mandarin but still doing college level work in that language would be very difficult for him. And what % of (non-Chinese) American students have studied Mandarin at all?

    However, maybe there are good deals to be had in other English speaking countries? Canada, UK, Australia, NZ? I dunno.

    What I do know is that admission to places like MIT is highly sought after in Asia, so maybe they know something that you don’t know.

  12. But isn’t “easy money” (from the school’s point of view) exactly why college is so expensive? And if Obama is trying to minimize “easy money” for colleges, why float the idea at the same time as one about backing 2 years of local education with government money? I mean, I get it; that money will come with strings as pertains to the community colleges’ behaviors and offerings. Government money always does. But that’s the easiest money of them all, further exacerbating the main problem with runaway tuition rates. All of this is just more government intervention (as with the banks) in an industry which needs to be allowed to correct itself, which is especially disappointing, considering that the first of my 3 kids is a sophomore in high school.

  13. People don’t tend to value things that are given to them for free. Back when she was in college, my wife was involved with some sort of program that offered tutoring to inner city students who were struggling in school. They found that when the tutoring was completely free, people wouldn’t show up and they wouldn’t even bother to give advance notice that they were going to miss their appointments. However, when they began charging for the service, people took it much more seriously.

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