Treasury wants to Improve 529 Plans; Geithner Thinks Saving for College Will Spur Economic Growth

Yesterday, Vice President Biden took his Middle Class Task Force world tour to Syracuse University to discuss college access and affordability. The forum’s all-star lineup also included Treasury Secretary Tim Geithner and Education Secretary Arne Duncan.

The event coincided with a report from the Treasury Department on the effectiveness of 529 college savings plans (full disclosure: New America, through the College Savings Initiative, is mentioned as a resource multiple times). You can read Treasury’s observations and recommendations here.

More interesting however, was Secretary Geithner’s full-throated support of saving broadly — and saving for higher education in particular — as a means to close achievement gaps and regain America’s footing as a global education leader. From Geithner’s remarks:

College affordability is central to two key economic trends. Over the past generation, we have gone from a nation of savers to one of borrowers. We have devoted too many resources to consumption and not enough to investment. During this same period, we have also lost our global educational lead. While we once outpaced all other advanced economies in the percentage of our population that graduated from high school and college, much of the rest of the economically developed world has now caught up or surpassed us.

On the potential of 529 plans, and the populations for which they can be improved:

These plans can be an immensely effective way for Americans to save for college. They are generally administered by the states, and they allow people to put aside money for college and enjoy investment earnings that are free of federal taxes and, in some cases, receive state tax benefits, as well. When state tax benefits are included, a typical middle class family can accumulate 25 percent more in 529 accounts than they can in a typical taxable savings account.

But in a report being issued by Treasury today, we find that these accounts are not being broadly used by Americans who could benefit from them. For example, only 5 percent of families with children in the middle of the income distribution have 529 accounts, while nearly one third of those in the top 5 percent of the distribution have them…

…Helping Americans save more for college will help more go to college. Helping Americans save more generally will help the overall economy. Only by pursuing both aims and reversing the unfortunate trends of the past generation will we achieve the President’s goal of a new foundation for growth and a sustainable prosperity for all Americans.

While the forum, and the report, were spurred by a desire to help (if the name of the task force didn’t give it away) middle-class families, improvements in the 529 platform could have a broad impact down the economic food chain as well. Research shows that even small amounts of targeted savings can lead to behavioral changes for low- and middle-income families. If Treasury and other policymakers are serious about college savings as a way to spur economic growth, then those who stand to benefit the most will need incentives to do so.