At a time when low-income
students are underrepresented in higher education and the cost of attendance is
becoming increasingly unaffordable, 529 college savings plans have the
potential to address issues of college readiness, access and completion. Savings can help reduce higher education debt,
making college more affordable, and has the potential to change aspirations and
behaviors of both students and their parents. Research from the asset building
field shows that even a relatively small amount of savings may have positive
impacts on behavior and educational achievement.
Awareness and participation
in college savings plans have grown significantly since they were created by
states in the 1980s, inserted into the Federal tax code as Section 529 in 1996,
and given federal tax-advantaged status in 2001. But because lower income
families receive little or no tax benefits from saving in 529 plans, 529
participants tend to be middle or high income. Removing potential barriers and creating
new incentives for participation could increase the number of low- and moderate-
income families that save in 529s and make it easier to build assets for higher
education.
While 529 plans are defined in the federal tax code,
individual states have considerable latitude to innovate and make their plans
more inclusive. Some states have undertaken
large-scale initiatives, such as matching contributions or establishing accounts
at birth. Other states have been exploring a number of smaller, lower-cost innovations
to remove disincentives and increase savings, as detailed below. States are
often the testing ground for future federal policies, and several of these initiatives
could also be enacted at the federal level.[1]
Default
Investment
Issue: Research
shows that inertia and indecision limit people’s ability to save and
invest. One way to help families save in
529s is to provide a default investment for each direct-sold 529 savings
plan.
State Policy Option: Provide a default investment option when participants
do not wish to select an investment. If the federal government issues
guidelines on 529 default investment options, more states might be encouraged
to create a 529 default investment option.[2]
Low-Fee
Capital Preservation Investment Options
Issue:
Many families have lost significant portions of their 529 plan assets; others hesitate
to invest for college in the wake of the recent financial crisis. Offering reliable,
safe, and low-fee investment options could help assuage these fears and increase
enrollment in 529s. Some states currently offer FDIC-insured or capital
preservation investment options, while others do not. In addition, not all of these
funds have low fees.
State Policy Option: Offer at least one low-fee guaranteed or capital
preservation option.
529 Enrollment and
Contribution on State Tax Forms
Issue: Some state tax forms allow contributions to existing
accounts, but individuals cannot currently enroll in a 529 college saving plan
via the state tax form. Allowing individuals to open 529 plan accounts on their
state tax forms and funding them with a state tax refund could increase plan
enrollment.
State Policy Option: Ensure that the state-sponsored 529 account can be
opened and state tax refunds can be deposited into 529s through a relatively
simple process. For certain states, this option may be more feasible and
inexpensive than others, depending on the structure and administration of the
529 plan.
Employer
Tax Credit for 529 Accounts
Issue:
Payroll deduction and employer matching has dramatically increased enrollment
in retirement savings plans. Using the same strategy for college savings plans
could encourage employees to save for their children’s college education or
their own retraining. Meanwhile, low-income families cite employer matching as
the most likely incentive to motivate them to start saving for higher
education.[3]
The State of Illinois
recently passed a law which will provide a tax credit for employers to match
employee contributions to the state 529 plan.[4]
State Policy Option: Provide a small state tax credit for employers to
facilitate account opening, payroll deduction, and potential matching
contributions for 529 plans up to a certain amount.
529s
and Asset Limits for Public Assistance Programs
Issue: Many public assistance programs limit the amount of
assets individuals can hold, which is a disincentive for low-income families to
save for college. Recent federal legislation exempts 529 contributions from
asset tests in the Supplemental Nutrition Assistance (Food Stamps) Program. Several
states currently exempt assets, including 529s, from eligibility calculations
in programs such as TANF and Medicaid. But many other states have not followed
suit.[5]
State Policy Option: Exempt 529 assets from state eligibility calculations
for assistance programs such as TANF and Medicaid.
529s
and State Financial Aid
Issue: Currently,
up to 5.6% of the value of a parent-owned 529 account may be used in calculating
eligibility for federal financial aid. States, however, vary in their
eligibility calculations for distributing need-based awards. Approximately 17 states
currently exempt assets in 529 plans from financial aid calculations. This uncertainty
creates a disincentive for many low-income families to save for college, out of
fear that financial aid awards will be diminished if they were to put money
into a 529 college savings account.
State Policy Option: Exempt 529 contributions from need-based financial
aid calculations for public colleges and universities, and for private colleges
and universities in the few cases where states provide need-based financial aid
for students attending those institutions.
The College Savings Initiative
The
College Savings Initiative was launched in 2009 as a joint venture of the Asset Building
and Education Policy Programs of the New America Foundation and the Center for
Social Development (CSD) at Washington
University in St. Louis. This work is supported by the Lumina Foundation for Education and the
Bill & Melinda Gates Foundation.
For background information on
529 college savings plans or the College Savings Initiative please go to
http://collegesavingsinitiative.org
[1] Clancy, Newville and O’Brien. Five Low-Cost Federal Policy Ideas to Help Families Save for College. April
2009. Available at http://collegesavingsinitiative.org
[2] Clancy, Lassar, &
Miller (forthcoming). Streamlined 529 Enrollment and Default Investment:
Innovations in the University of Alaska
College Savings Plan.
[3] Sallie Mae and Gallup. How America
Saves for College 2009. 2009. Available at
http://www.salliemae.com/about/news_info/research/how_America_saves/
[4] Illinois
Public Act 096-0198. Available at
http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=096-0198
[5] Mason, Clancy, & Lo. Excluding 529 College Savings Plan accounts from Oklahoma public assistance asset limit
tests. (2008). Available at
http://csd.wustl.edu/Publications/Documents/PR08-14.pdf
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