College-Savings Plans in U.S. Shrank $23.4 Billion Last Year

The value of college-savings plans fell 21 percent last year, a loss of $23.4 billion, as the bear market left American families with less money for tuition and put pressure on schools to increase financial aid.

Assets in the savings accounts, called 529 plans, declined to $88.5 billion from $111.9 billion at the end of 2007, according to data compiled by Financial Research Corp. in Boston and the Washington-based College Savings Foundation. The drop was mostly driven by the selloff in stocks, which lost 38 percent as measured by the Standard & Poor’s 500 Index.

Students are being squeezed by rising tuitions and tougher loan requirements. The average tuition cost at a four-year public college rose 5.7 percent in the current academic year to $14,333, while the expense for a private college rose 5.6 percent to $34,132, according to The College Board, a New York-based nonprofit best known for administering college-admission tests such as the SAT.

“People in general are struggling with what the markets are doing,” Kevin McMullen, chairman of the College Savings Foundation, said in an interview. “Still, people are viewing college plans as a long-term plan,” resulting in fewer redemptions than he expected, McMullen said.

Withdrawals were $788 million in the fourth quarter of 2008, down from $1.02 billion a year earlier, according to the savings foundation, a nonprofit that provides information and compiles data on education plans. With job losses and fewer available loan programs, individuals are probably viewing college-savings plans as the best option, McMullen said.

The data don’t distinguish between redemptions made to pay education costs and those where savers took the money for other purposes.

Sallie Mae

Lenders such as New York-based Citigroup Inc. have pulled back on certain types of loans to students, while others such as SLM Corp., the Reston, Virginia-based company known as Sallie Mae, may lose the ability to make as many student loans because of federal cutbacks.

Sallie Mae, the largest provider of U.S. student loans, may lose three-quarters of its origination business under President Barack Obama’s plan to end government subsidies for school lenders.

The College Savings Foundation tracks $34 billion of assets in 529 plans, named for the section of the U.S. Internal Revenue Code that provides tax breaks to encourage saving for higher- education costs. About 67 percent of those assets are in age- based portfolios, which get more conservative and move to bonds as the student nears college age. The remainder is in static and individually directed portfolios.

Florida Tops Returns

The Florida College Investment Plan finished first among all direct-sold 529 savings plans in one-year and three-year investment performance for the period ended December 31, 2008, according to a separate study released yesterday by Savingforcollege.com LLC, a North Palm Beach, Florida-based unit of Bankrate Inc. that provides advice on college plans.

The equity option sold in the Florida plan, managed by six managers including Northern Trust Corp. and Deutsche Asset Management, declined 33 percent in the year ended Feb. 19, according to data compiled by Savingforcollege.com. The Standard & Poor’s 500 Index of U.S. stocks fell 42 percent during that time period.

“I wouldn’t say there is panic, but there is a lot of concern” over declines in college-savings plans, Joseph Hurley, founder of Savingforcollege.com. “If you need money in the short term, it is better to choose conservative options,” which offer a protection of principal, Hurley said.

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net. (Bloomberg)