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529 E-ditorials

00-2: Heading for tuition deep freeze?
Joe Hurley
Wednesday, January 19th 2000

I sat up and took notice a couple of weeks ago when the New York Times reported that my very own alma mater, Williams College, announced that it would keep its tuition, room, board, and fees unchanged for next year, the "first highly selective institution to do so in decades." Wow! What happened to the usual two- or three-times inflation tuition increases that we are used to seeing?
Apparently, the college bill at Williams has fallen victim to a stock market that has helped (along with strong contributions) to triple the endowment since 1990, from $333 million to over $1 billion. Perhaps embarrassed by all this wealth, college officials decided to use some of it to hold the $31,250 current price tag steady.

There are a lot a private colleges and universities that have seen their endowments soar over the past few years, and so we may be witnessing the beginning of a trend among them to drastically reduce or freeze the rate of tuition increases. We have seen some other evidence of this recently. The College Board recently reported that total costs at the average four-year private college increased 4.3% for the school year 1999-2000, versus an increase of 6.5% in the prior year.

Public institutions also seem bent on keeping increases low, although the motivation comes more from political considerations and state budget processes than from the booming stock market or the level of private donations. The average total cost at four-year public institutions increased 4.0% in 1998-99 and 4.1% in 1999-2000. According to The Chronicle of Higher Education, the states seem willing to increase financial support at a healthy rate (about 7% more on average in fiscal year 2000 than in the prior fiscal year). In some states, such as Connecticut and Virginia, the public institutions have been forced to freeze or slash their tuitions as a condition of the increased state support.

Of course, the general inflation rate has been extremely low in recent years and so the average college cost has been increasing at a greater rate than inflation. It has also been outstripping increases in average family income, particularly among low income families.

What does all this mean for 529 plans? Well, for one thing it means that the 529 plans providing an investment return tied to college inflation (i.e. prepaid tuition plans) are not looking too good right now compared to market investments (like 529 savings plans). If your prepaid tuition contract is purchased from a state where tuition is frozen, by definition your investment is also frozen. Savings plans fared much better in 1999, especially the accounts that were more heavily weighted in stocks.

Of course, who knows what college inflation may look like in a few years if the economy goes sour or the stock market stagnates. But for now, anyway, it looks like tougher sledding for the prepaid tuition plans. Little wonder that so many are now planning to start up a 529 savings plan. It just makes good sense.

» 05-4: The 529 marshals have arrived - 08/30/05
» Our 5.29th-year anniversary - 06/29/05
» 05-2: 529s and the new Bankruptcy Act - 04/28/05
» 05-1: Reform or Deform? - 02/27/05
» 04-6: Perspectives on the 529 debate - 12/28/04
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