Saving or Scrimping?

For the most part, in terms of education, New Mexico ranks towards the bottom of most categories. In Education Week magazine's annual Quality Counts report, released in January, New Mexico came in last nationwide in its "Chance-for-Success Index."

According to data from the US Department of Education, New Mexico also has the second-highest default rate on student loan debt, beat out only by West Virginia for that dubious superlative.

There is at least one obscure element of the education system in which New Mexico does well: 529 college savings accounts. Though these accounts are available in every state, New Mexico's, which has existed for 22 years, is one of only four that offers unlimited state income tax deductions on money that people put away for college. Those tax-sheltered piggybanks now number around 120,000 statewide and contain over $2 billion, according to The Education Plan, the organization that originates one of the state's two 529 plans.

Although the state's 529 returns got some bad press shortly after the financial crisis, their performance appears to have improved. Depending on when the plan was started and how much risk was taken on, annual average returns can reach up to 10%.

Whether this helps those who don't have the means to establish a nest egg for their offspring is an open question. Most of the people who are using the accounts are wealthy, and many average people may have never even heard of them.

"I think that's why these plans haven't been more widely utilized," Jocelyn Black Hodes, outreach director for The Education Plan, tells SFR. "Because typically the only way someone's going to hear about it is through a financial adviser, and relatively, there are few people who have access to a financial adviser or can afford that."

Of course, there's no criteria for people who want to open an account, and the state's plan makes it free and easy. Hodes hopes that eventually 529s will become a sort of 401(k) for education—a household name for an investment account that employers participate in.

In terms of addressing New Mexico's immediate educational woes, there might be better policies to pursue.

"College savings plans are great, but there's a lot more we can do at the state level," says Cirila Estela Vasquez Guzman, a policy analyst for New Mexico Voices for Children. She tells SFR things like education grants, need-based financial aid and funding for public schools matter a lot more—and all those programs are paid for by the very tax base that 529 accounts reduce. Besides, most of the benefits of the accounts go to those who already have the means to contribute, growing their savings and keeping more of their earnings, while less-wealthy people fall behind.

There's also risk to consider. Because 529s invest in financial markets, the possibility to lose money in the event of a downturn exists. That risk is outweighed, Hodes says, by the rapidly rising cost of education. In order to keep up, taking on some risk could be the smart move.

"It's a matter of which trade-off you're more comfortable with," Hodes says. "Of course if you're absolutely not comfortable with taking on any risk and subjecting your contributions to stock market fluctuations, maybe this isn't the right vehicle."

Carolyn Slater Whitehill, a Santa Fe retiree who set up 529 accounts for her grandchildren, says that she was glad to contribute, especially considering how expensive college has become for younger generations.

"It's a good thing to do, you know, for people who've got the money available toward helping children or grandchildren," Whitehill tells SFR.

For less well-off people, there are still ways to get benefit from the existence of these accounts. Putting money aside will result in faster growth than savings accounts, and if people without wealth start small early enough, their account could grow to a decent size.

Plus, if a parent, grandparent or a student is enrolled in school and is actively making tuition payments, they can open an account, deposit the money in the account and then pay their bill from there, shielding some of their income from taxes even if they are living paycheck to paycheck. Those families would miss out on the relatively high-yielding 529's investment opportunity, but they can at least use the accounts to lower their income tax bill slightly.

The funds deposited in these accounts can be used for more than just traditional universities, and for more than just tuition. Students of vocational schools, community colleges and online students can use those dollars for every element of their classwork, from computers and equipment to certifications. Room and board are also qualifying expenses.

Hodes believes if more people knew about 529s, New Mexico's education successes might rise, chipping away at those unfavorable statistics, especially if their popularity grows beyond the well-off.

But are these savings plans really benefiting everyone, or do they only serve as a tax haven for those with the means to take full advantage of them?

"It's a good question, and it's one of the most common questions we get," Hodes says. "Is this really for everybody? Because there's certainly the stereotype that its just for the privileged few who have a financial adviser telling them, 'You should use these accounts and I'm going to manage them for you.' I argue that they absolutely can be for any family that values education."

For more information, visit theeducationplan.com.