The Disadvantages of 529 Plans

  Most people are familiar with 529 plans. These are investment vehicles used specifically to save for educational expenses like college. They’re great because families won’t pay taxes on the earnings made within their 529 investments. They are the most common way American families save for college and it’s how I’ve chosen to save for my own children. 529 plans are not perfect though and there are some disadvantages that savers should be aware of.

One of a 529’s biggest disadvantages is that funds can only be used for what the federal government calls qualified expenses. These categories include tuition, room and board, and some educational supplies. These are the most expensive costs related to attending college, but in reality, they probably don’t cover the full cost of keeping a young person who is away at college afloat and content. Further, the amount that you are able to withdraw from a 529 for each category is capped by the college or post-secondary institution the student attends. This can be a problem in some scenarios. For example, if the college you attend sets their off-campus living expense at $500 a month, that’s the most you can withdraw from your 529 plan to pay for an apartment you might rent. If you find an apartment that costs $600 a month to rent, you can still choose to live there, but that extra $100 for rent is going to have to come out of your pocket and not your 529 savings.

Another disadvantage is that the money a family has stashed away in a 529 plan is considered an asset when a college calculates financial need. This can work to reduce or eliminate a student’s financial aid eligibility for things like Federal Pell Grants, need-based scholarships, and subsidized student loans.

Both of these points conspire to create somewhat of a disincentive to save in a 529 plan or at least to over-save. To be sure, having too much money saved for college is a good problem to have, but it can be problematic nonetheless. A family who found themselves with a surplus of 529 funds they were unable to find another use for could withdraw and pocket the surplus, but they’d be forced to pay taxes on the earnings that were leftover in addition to a 10% penalty. That could be a costly sum. Those other uses I mentioned could be redirecting the 529 funds to a student’s sibling or sitting on it a little longer in case the student decided to go back to school for a master's or doctorate program down the road. 

To get around these drawbacks to 529 plans, some savvy parents have chosen some other savings vehicles that might not be truly intended for educational savings but get the job done. These might include taxable brokerage accounts, IRAs, Uniform Gift to Minor Accounts (UGMAs), or even whole life insurance policies. Families can speak to financial advisors if they are interested in these as a 529 plan alternative.

Why you Should Probably Take Statistics in High School

  Mark Twain once famously said, “There are three kinds of lies: lies, damned lies, and statistics.” Perhaps the sentiment he is implying there wouldn’t be quite so true if probability and statistics were taught to more students.

Statistics is the practice of collecting and analyzing data and using that information to infer proportions in a whole from a representative sample. That practice is quite different from what happens in other kinds of math, but it is no less important. Most American students will touch on statistics early on in school. They might encounter some basic problems like, “if I have ten marbles in a box and six of them are red and four of the blue what is the chance I pull out a blue one?” However, as they get deeper into grade school and into high school they are very likely to skew away from statistical instruction. Indeed, no state currently requires that high school students take a course in statistics but many do require credits in other courses like algebra and geometry. As a result, students are far more likely to encounter geometry and algebra in middle school. 

Geometry is kind of a one-off and many high school students will study it for a year. High School students who do well in math tend to eventually be fast-tracked to Algebra 2 and from there, trigonometry and calculus are natural progressions. Probability and statistics are kind of like the town that gets bypassed by the railroad tracks and not enough students are taking a detour to get there.

The problem with this is that statistics is an extremely practical math. The American Statistical Association lists about 150 broad college majors that are likely to require a college-level course in statistics. Far less require calculus or trigonometry and those that do may well also require statistics. Anyone who might have to read a study or report that speaks to some collection of data will likely benefit from some understanding of statistics and that happens in countless careers that require a college degree. Actually, I might be hard-pressed to think of one career that would never require someone such a report. 

Still, outside of colored marbles in bags, the first time the majority of American students study probability and statistics deeply is at the college level. Encountering a new kind of math for the first time in college does not likely lend itself to the best possible outcome. Even getting into college could be an issue. Here is a stat for you, about 30% of the math questions on the SAT relate to statistics or data analysis.

The good news is that while no high school requires statistics, many do offer it. So, the simple solution to all of this is to take the statistics class your high school offers. You have to take some math anyway and this should count for that. You’ll be better prepared when you likely have to take a statistics class in college and even if you don’t, you’ll be a more well-rounded mathematics student for the rest of your life. Probably.