) -- When 529 plans, designed for college savings, were created by Congress in 1996, they were based on the structure of 401(k) retirement plans.
The idea, and it seemed like a good one at the time, is that states could create and manage two flavors of college-savings vehicles. One would be an account plan with compounding interest. The other would offer the opportunity to pre-pay an education using an interest-bearing account that would offset inflation.
At the time, 401(k)s were all the rage, coming into their own as a replacement for conventional pensions and showing impressive quarter-over-quarter growth. Parents were thrilled by the new option. Of course, the 1990s hosted one of the greatest bull markets in history.
Parents aren't so happy anymore.
Just as the stock-market crash that started late last year ravaged retirement accounts, many 529 plans lost as much as 50% of their value. For retirement plans, bull and bear markets offset each other over the course of 45 years. But 529 plans often have less than half that time to earn money for college -- especially for those with a child ready to enter college this year or next.
Parents who went the prepaid route have just as much to worry about.
This spring, the Alabama Prepaid Affordable College Tuition trust revealed it had lost more than 45% of its value. While some states protect investors for losses, parents in Alabama weren't so fortunate. The gravity of the situation was driven home by a letter that informed them that the plan has no "legal or moral obligation to ensure the ultimate payout."
Kevin Carey, policy director of Education Sector, an education policy think tank, has been a vociferous critic of 529 plans, blaming their meltdown on the fact that "public officials told
parents to risk their children's educational future in a casino run by idiots and thieves."
"When this whole 529 thing took off, we imported a lot of the logic and rhetoric around retirement savings into saving for college as if they were more or less the same thing," he says. "But there are some very obvious differences between the two."
As Carey sees it, parents have been coerced into jumping on the 529 bandwagon.
"You are in the hospital having a baby and they are handing you 529 pamphlets," he says. "People are told that this is the right thing to do by your child."
Carey blames a lack of foresight on the part of elected officials. They need to do more, he says, to rein in public college tuition increases, pressure private colleges and increase need-based financial aid.
"They need to do something because people are rightfully very anxious about the fact that college keeps getting more and more expensive," he says. "Then just say not to worry about it because we have this great college savings plan -- which works OK, until the market crashes. The problem is that nobody knows when the market is going to crash again but we do know it is going to crash again sometime."
-- Reported by Joe Mont in Boston.