President Barack Obama recently proposed to remove a major tax benefit from 529 accounts, which millions of families use to save money for college. The account name, 529, refers to section 529 section of the Internal Revenue Code. According to a New York Times article, experts say these tax-advantaged accounts primarily benefit affluent families. Altogether, seven million families are using 529 plans and have saved $217 billion. The article notes that families with an income of over $200,000, which puts them in the top 6 percent of the population, hold 70 percent of 529 accounts. The president’s proposal would have replaced all current college savings tax preferences with a single tax credit that would be more widely available to middle-class families, but that proposal had no chance of passing this Congress. Due to public pressure, President Obama withdrew his proposal to remove tax benefits from 529 accounts. While Woodstock Institute applauds President Obama for trying to make college more accessible for the middle class, there is much more that can be done.
College prices are rising, pushing potential parental contributions to the extreme and requiring students to take on more student debt. To address this, millions of parents have been putting money away for their children’s education in 529 college savings plans. These plans allow parents to put money into an account that grows tax-free. Money withdrawn from these accounts for qualified educational purposes is also not subject to taxes. The 529 college savings works by encouraging parents to save so their children can attend college without taking on excessive student debt.
College savings accounts can also have a positive effect on college enrollment and completion, even when families can save only a small amount of money. A recent study found that a low- or moderate-income (LMI) child with $1-$499 saved in an account for college is 2.5 times more likely to enroll in college and 4.5 times more likely to graduate than an LMI child without any college savings. Expanding access to 529 accounts will not only help lower-income children save money, it will also lead to an increase in college enrollment and graduation.
Illinois has its own version of the 529 account: the Bright Start Program. Many people participate in this program, but groups such as our partners in the Illinois Asset Building Group (IABG) want to expand access and participation by lower-wealth families. Data from 2012 and 2013 show that more affluent families were the major beneficiaries of Bright Start. Low-income families opened only three percent of all the Bright Start accounts opened in 2012 and 2013. To make these accounts more accessible for Illinois families, IABG recommends several adjustments, including:
- Make enrollment easier by removing application barriers
- Provide applications and informational materials in languages other than English
- Do not require a minimum deposit
- Create easy deposit options
- Provide enrollment opportunities during tax season
- Partner with Illinois Child Support Services
- Exempt investment in 529 accounts from need-based financial aid calculations from colleges and universities that receive state funding
- Add a matched-savings component for lower-income families
Access to affordable higher education is critical to helping low-wealth people advance up the economic ladder. According to the Institute of Education Science’s 2012 study of workers ages 25 to 34, a bachelor degree can raise a worker’s median salary by almost $17,000. A report by the Federal Reserve Bank of San Francisco also noted that the average college graduate stands to earn $800,000 more than a high school graduate in a lifetime. Presenters at Woodstock Institute’s 40th anniversary symposium noted that student loan debt disproportionately burdens students of color and that having access to a 529 account could help ease college costs for these students. William Elliot of the University of Kansas argued that families who save for college earlier can avoid taking on thousands of dollars in student loans.
Woodstock supports the use of 529 savings accounts to help set the foundation of a child’s future. Clearly, the current tax benefits provided by 529s are not enough to expand savings opportunities for low-wealth families. Illinois must reform the Bright Start program so that all families can take advantage of this opportunity.