For the past few years, I've been putting money away in
Ohio CollegeAdvantage 529 plan for my kids. Just recently, CollegeAdvantage brought back their
referral bonus program and various personal finance sites (examples:
MyMoneyBlog,
The Sun's Financial Diary) are posting their referral links. Last year when this program came about, I sent the info around to co-workers and friends with children thinking at someone was interested in saving up for their kids' college expenses. Nope, not a single bite -- not even with free money in the deal. College savings appears to be way down the list for Americans.
The return of this deal got me thinking some more. Perhaps I and every other person saving for their kids' college expenses are barking up the wrong tree. After all, the cost of college depends on supply and demand. The more money that's earmarked specifically for college -- whether via student loans or 529 plans with a penalty for non-school use -- the more expense go up.
Unfortunately this is a prisoners' dilemma situation. If collectively everybody decided not to save for college and not to take out student loans, the cost of college would drop drastically. If only a few people "break the bargain", those few people benefit more than the collective. But if a large number of people decide to optimize for their personal situation, everybody ends up losing.
It sounds like the prepaid college plans may be the best option. Except these guarantees are just as set in stone as social security is for younger workers. If college costs grow faster than expected, states either have to default on their guarantees or raise taxes to cover the liabilities. We already see Texas wrestling with this issue with the
Texas Tomorrow Fund facing bankrupcy.
What to do about this situation, I do not know. Again, there are steps an individual can take to reduce costs (AP exams, community college) but if everybody takes these steps, then you would see costs shift there as the industry would follow the customers.
(Filed in economics)
College Costs, Prisoners' Dilemma
Posted by Mossy
September 26, 2009 2:25 AM
The return of this deal got me thinking some more. Perhaps I and every other person saving for their kids' college expenses are barking up the wrong tree. After all, the cost of college depends on supply and demand. The more money that's earmarked specifically for college -- whether via student loans or 529 plans with a penalty for non-school use -- the more expense go up.
Unfortunately this is a prisoners' dilemma situation. If collectively everybody decided not to save for college and not to take out student loans, the cost of college would drop drastically. If only a few people "break the bargain", those few people benefit more than the collective. But if a large number of people decide to optimize for their personal situation, everybody ends up losing.
It sounds like the prepaid college plans may be the best option. Except these guarantees are just as set in stone as social security is for younger workers. If college costs grow faster than expected, states either have to default on their guarantees or raise taxes to cover the liabilities. We already see Texas wrestling with this issue with the Texas Tomorrow Fund facing bankrupcy.
What to do about this situation, I do not know. Again, there are steps an individual can take to reduce costs (AP exams, community college) but if everybody takes these steps, then you would see costs shift there as the industry would follow the customers.
(Filed in economics)
Leave a comment