Creating a Progressive 529 Plan

Blog Post
Sept. 2, 2008

Barack Obama wants to give families a refundable $4,000 tax credit for college if their children complete a required amount of community service. It's a fine, conventional Democratic idea. It could be a lot more powerful, though, if Obama coupled it with an old Republican favorite -- depositing his $4,000 credit into private accounts like the so-called 529 plans that so many upper-income families use to save for college.

There are already 12 higher education-related tax credits and deductions on the books, including the Clinton administration's HOPE and Lifetime Learning tax credits. To varying degrees they make college more affordable for those with taxable income who get over the hump of initially enrolling in school.

But the current education tax benefits are a mess of different eligibility standards, confusing forms, delayed delivery, and regressive rewards. One in four eligible families claims the wrong amount, according to the Government Accountability Office. And financial aid specialists agree none of them do a good job at promoting college access for those who otherwise wouldn't go.

The real "post-partisan" college affordability and college access policy is to simplify our higher education tax benefits and deposit those proposed $4,000 credits into a 529 college fund created in each individual child's name. Named after the relevant section of the tax code, 529 plans are tax-favored investment or savings accounts run by brokerage firms under contracts with the state.

A progressive 529 savings program could start with low-income eighth graders, if not younger students. That way, children would get the benefit of tax-deferred growth, college aspirations would go up, and progressive 529 college funds would act as a magnet for additional contributions from employers, religious groups, philanthropy, and others. Children who don't go straight to college would be able to tap their accounts later or pass it on to a dependent.

Under this proposal, as opposed to the current HOPE and Lifetime Learning credits, funds would be available to community-college and part-time students. Cash would be available immediately when college bills are due, and could be used to offset room, board, and textbook costs as well as tuition. Families wouldn't even have to file a tax return. And by folding in the existing HOPE and Lifetime credits, the plan's costs are minimized beneath what Obama has proposed.

There's precedent for progressive 529s. Eleven state 529 plans, including those in swing states like Colorado and Michigan, already have initial deposit, matching, and other features to encourage low-income families to take part.

Moreover, withdrawals are easily conditioned on good behavior, including proof of community service as per Obama's original plan. That's a good condition. Children who serve or work about 10 hours a week to pay for college take their studies more seriously, manage their time more effectively, and learn two important values: First, in this life, you don't get something for nothing; and second, each of us has a responsibility to others.

Washington could go further and condition its contributions to a state 529 plan on states maintaining their own spending on higher ed, in order to keep them from using the plans as an excuse to raise tuition. The federal government requires that states keep up their part to get K-12, transportation, and Medicaid funds - and Washington should do the same with higher education funding.

A bear market might seem a strange time to promote private accounts. But not only is the stock market strong over the long term, account funds can be invested in solid government bonds as a default. If a state wants to allow parents to invest in more aggressive securities, it can.

The key is for Democrats and Republicans to establish a universal platform for college savings, to encourage all students to take their studies seriously, and to break the political paradigm of government entitlement versus private responsibility. We can have both. And if every child has a college fund, we'll all win.

Michael Dannenberg, the founder of the New America Foundation's Education Policy Program and former editor of Higher Ed Watch, wrote this column for The Boston Globe. Dannenberg is now a senior fellow with New America.