After Oppenheimer: Improving College Savings Plans

After their children's college savings accounts lost 38 percent of their value last year, some Illinois parents might be seeing some justice soon. The Illinois Treasurer's office recently reached a tentative deal with Oppenheimer funds to recover $77 million of the $85 million in losses.

These parents had invested in an Oppenheimer bond fund, through the state's Bright Start College Savings Program that was marketed as a conservative investment. Many of these families were saving for children that were either ready to start college or just a few years out. Other states like Oregon that offered the Oppenheimer fund in question may soon be making similar deals as well.

Despite problems like these, with rising costs and shrinking financial aid packages families still need to save for college. 529 college savings plans are one of the best ways to do this since they allow savings to grow and be withdrawn tax free when used for higher education expenses.

Just ask Michelle and Barack Obama, who recently put aside $240,000 in the Bright Start College Savings Program for their daughters, Sasha and Malia.

The Oppenheimer incident however clearly demonstrates that there is room for improvement with college savings plans, including minimizing some of the risks involved and making sure they work for families of all incomes.

One good place to start improving 529 college savings plans is to ensure that all states offer some truly conservative investment options. These investments could take the form of capital preservation investment options, such as a money market mutual fund, and age-based funds that start out more aggressive but automatically and seriously become more preservation focused as the child approaches college age.

Another necessary first step is improved disclosure. Families should be better informed about what they are investing in and what the real risks are. This means disclosures that are straightforward and brief, written in plain English. Similar reforms have recently been proposed for credit cards and mortgages.

There are also larger improvements to 529s that can be made on the federal level, especially those that can make 529s work better for low- and moderate-income families. Despite proposals to expand Pell Grants and reform federal student loan programs, these families need to save as well. Right now they don't typically benefit from the tax advantages for 529s, so they have little incentive to save for college. This is unfortunately the case even though these families have a greater need to save and can benefit the most from it.

The Obama administration has recognized the seriousness of this problem and recently committed to improving 529s so that they help all families save for college. Earlier this year Vice President Joe Biden held a town hall meeting in St. Louis to discuss the college affordability crisis which included a focus on savings and 529s. The Treasury Department is currently studying the issue and will be releasing a report with recommendations sometime this fall.

Some of the changes they should recommend include the federal government or states providing direct incentives for low- and middle-income families to invest in college savings plans by matching a portion of annual deposits. Thirteen states already do this or something similar to it. The federal government could also provide tax incentives for employers to encourage them to enroll their employees in 529s for their children and match contributions, similar to what many do for retirement today with 401(k) plans.

President Obama recently proposed creating tax-free universal savings accounts to help adults save for their retirement. Why not open a 529 for every child at birth or when they enroll in kindergarten to help save for a college education? You could even seed every account with a couple hundred dollars to help them get started. This would have every child saving for college from day one, to ensure that they have both the opportunity and means to pay for their education.

Getting more families to save for college won't solve the college affordability crisis by itself. Saving and investing will also never be without risk. But like the Obamas, all families, regardless of income, need to save for the future and should be empowered to do so. They also need a truly diverse range of investment options available to them with reasonable and straightforward disclosure of the risks involved. These steps will help ensure that all children have the opportunity to attend college and realize all the benefits that come with it without drowning in debt.