The College Savings Foundation’s sixth annual How Youth Plan to Pay for College survey of high school seniors, juniors and sophomores across the country found they showed both the will and the way to fund higher education, including greater use of 529 college savings plans.
By Katherine Mangan
For years, advocates of 529 college-savings plans have struggled to persuade people that they’re more than just tax shelters for the rich. The backlash that hit after President Obama proposed taxing the plans to help pay for his free-community-college proposal gave the advocates new talking points as they gathered here this week for their annual meeting.
If nothing else, the kerfuffle shined a spotlight on a savings strategy that most Americans know nothing about. “All of a sudden, 529 plans were all over the news,” said Roger Michaud, a senior vice president at Franklin Templeton Investments, one of the companies that manage the state-sponsored plans, during a break in the College Savings Foundation’s meeting. “We were able to point to statistics that show that these plans aren’t just for wealthy people.” The foundation is a nonprofit organization that promotes the plans as part of its push to get people to save more for college.
Just under 10 percent of 529 accounts are owned by households with annual incomes below $50,000, and more than 70 percent by those earning less than $150,000, according to a report by Strategic Insight, a research and consulting firm.
No one disputes that wealthier people benefit more from the tax breaks the plans provide, as well as their gift- and estate-planning benefits, as a recent breakdown by The Chronicle showed.
But advocates of the plans insist their target audience is squarely middle income—a category whose parameters no one can agree on.
The plan’s primary beneficiaries are “families who don’t qualify for direct aid or work-study resources but can’t write a check for college,” according to Mary G. Morris, the foundation’s chair and chief executive officer of Virginia’s 529 plan.
Conflict With Retirement
The state plans are named for the section of the federal tax code that exempts their earnings and distributions from federal income taxes.
They come in two forms: savings plans that provide tax breaks when the money is used for college expenses; and prepaid-tuition plans, which aim to lock in a future education at today’s rates.
In January the president proposed rolling back tax credits for 529 plans, arguing that they mainly benefit upper-income people who can already afford to pay for college. The savings would have allowed the government to shift subsidies toward needier people, he argued.
Expanding the benefits of 529 plans to more lower-income earners is important politically, said Joseph F. Hurley, founder of savingforcollege.com.
But that’s not easy to do for people struggling to get by. “The biggest reason families don’t use 529’s,” Mr. Hurley said, “is that they don’t have the ability to set aside funds, especially if they aren’t saving for retirement, which is usually seen as a higher priority.”
Many 529 plans provide tax breaks, scholarships, and other incentives for low- to moderate-income people to save for college. In Maine, for instance, every newborn gets a $500 grant invested through a private scholarship fund.
States that offer matching contributions of up to a set amount can appeal to people in lower tax brackets who wouldn’t necessarily see big tax savings from their investments, plan administrators say.
“If we can get people into the habit of saving $50 a month, or $600 a year, our program will match that with another $300,” said Bruce Wagner, chief executive officer of the Finance Authority of Maine, an independent state agency that administers college-savings plans.
Help for Those Who Don’t Need It?
Getting people to continue contributing is another challenge. It may require persuading parents that saving for college won’t hurt them in the long run by reducing the amount of need-based aid they may receive.
Even low-wage workers who expect Pell and other grants to cover the cost of their children’s education are likely to come up short, Mr. Wagner said. Money saved in a 529 plan can be used for books and other expenses not covered by financial aid.
In Indiana, 529 plans are promoted by teachers who volunteer to run the computers at back-to-school nights for elementary-school parents. A photographer is on hand to take pictures of third graders holding up their 529 certificates.
Even if families can set aside only $25 per month, those who save are more likely to send their children to college, attendees at the meeting said.
But not everyone agrees that 529 plans increase college enrollments. Robert Greenstein, founder and president of the Center on Budget and Policy Priorities, argued that the tax subsidies do little to increase enrollment “because they largely go to people who likely would attend college anyway, while doing too little for many people from low- and middle-income families who simply can’t afford college without help.”
Still, the amount of money in the savings plans grew last year to a record $248-billion, up 9 percent from the previous year, the College Savings Plan Network reported.
The average account held about $20,474, or enough to cover a little more than a year at a public college or university.
Households earning less than $50,000 a year had saved, on average, just $3,000, while those in the highest quartile had saved five times as much.