Potential of 529 College Savings Plans
a time when low-income students are underrepresented in higher education and
the cost of attendance is becoming increasingly unaffordable, 529s have the
potential to address issues of college readiness, access and completion. College savings can help make higher
education more affordable, and have the potential to change aspirations and
behaviors of both students and their parents.
Research from the asset building field has shown that even a relatively
small amount of savings can have positive impacts on behavior and achievement.
there has been growth in awareness and participation in 529s since they were
created by Congress in 2001, most families currently saving in 529s tend to be
middle or high income. The accounts are
currently structured so they provide benefits to people with higher incomes in
the form of tax incentives. Lower income
families receive little or no tax benefits from contributing to 529s, which
reduces their incentive to participate.
Improvements to the 529 platform could increase the
number of low and moderate income families saving in 529s and make it easier
for these families to build assets for education. These reforms include large initiatives, such
as coordinating existing higher education tax credits and financial aid with
529s, as well as small initiatives to increase savings. Below are several low-cost, simple reforms for
529s at the federal level. These would
be important first steps for enabling more low- and moderate-income students to
complete higher education.
Simple, Effective and Low-Cost Federal
Policy Options for 529s
Issue:Many federal assistance programs for low-income
individuals currently have limits on the amount of assets individual's can
hold. This can deter families from
saving for college.
Option:As part of the 2008 Farm
Bill, Congress exempted 529 assets from eligibility for the Food Stamp program.
Congress should build on this effort and streamline programs by also exempting
529s from the asset tests in TANF, Medicaid, SCHIP and other public assistance
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.
Option: Provide rules that allow
states to offer an appropriate default investment option when a participant
does not give instructions for the investment of his or her 529 savings plan
account. Require that all states have an appropriate default investment.
FDIC Insured or Capital Preservation Investment Options
Issue:In the wake of the current financial crisis many
families have lost significant percentages of their 529 assets. Several states
already offer FDIC insured or capital preservation investment options for the
529 plans, but families in every state should have this option available to
Option:Require that all states
offer at least one safe capital preservation investment option.
Issue:Many of the best innovations for increasing the
participation of low-income families in 529s have come from the state level.
Option:An incentive fund for states
could encourage the creation of additional innovations for getting low and
moderate income students into 529s. These innovations could include matching
funds, improved marketing and outreach, opening 529s on state income tax forms
and more. The fund could be as small as several million dollars and access to
funding could be dependent on increasing participation by low-income families
by a certain percentage in a given state.
Varying levels of money could be made available for varying levels of
participation. Funds could also be used to encourage innovative public private
partnerships that serve to leverage private funding for progressive 529
Use of Funds for Required Test Expenses
Issue:Currently funds in 529s can be used to pay for classes
at accredited post-secondary educational institutions. Use of funds for examination
or test expenses such as the GED, SAT and ACT may provide greater utility for
Option:Allow 529 funds to be used
to pay for certain required examination expenses.