SLC Regional Resource | March 2011

State Section 529 Plans

Jonathan Watts Hull

Americans understand the value of a college education and have continued to prepare financially for the costs of post-secondary schooling even as the economy has slowed. Almost every state in the South offers parents an opportunity to save for college through Section 529 programs, tax-preferred accounts named after the section of the tax code created by the IRS to authorize their special treatment under federal law. These programs take the form of prepaid tuition plans which allow participants to "lock in" current tuition at state schools college savings plans structured investments designed to realize gains in excess of tuition increases under normal circumstances.

In recent years, both types of Section 529 plans have faltered, due to a poor investment climate and rising tuition. When most programs were instituted, there was an unfailing optimism in the potential for the stock market to continue to expand and create returns that would outstrip any increase in tuition which historically ranged below 5 percent, making the extension of this state guarantee a risk of a presumably remote nature. As tuition skyrocketed and the stock market failed, however, states have been forced to reconsider the guarantee extended to prepaid tuition plans, and college savings plans are not keeping up with rising costs. This SLC Regional Resource offers a look at recent trends and events on state section 529 plans within the SLC member states.