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Posted by: Michael Mandel on February 16
I pointed out in my cover story that the government counts outlays for college tuition as consumption, rather than investment. Several readers wrote in and asked whether putting money into a college fund (say, a 529 plan) counts as savings.
The answer is yes and no. At the time when you put it in, it counts as savings. But when you take it out, the savings gets undone so the net savings is zero.
Suppose that your income is $1000 per year. In year 1 you save $50 for college. In year two you spend $50 on college. So in year 1 you spend $950, and it looks like your savings rate is 5%. In year 2 you spend $1050, and it looks like your savings rate is -5%. Averaged over the two years, you have zero savings, at least the way that the government counts it.
Pretty amazing, isn’t it?
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.