NEW YORK (MainStreet) — As April 15 approaches, Americans who can are squirreling money away in tax-advantaged college savings investment plans. State and federal policymakers, however, are investing their energy in Washington, D.C. to make these plans attractive to families whose financial struggles are so acute that their incomes aren’t taxable.
Think tanks and some states are experimenting with accounts that are set up and seeded by government agencies at the birth of each child. Moreover these accounts might in the future be flexible, lifetime funds for not only college, but retirement, buying a home, and other family necessities.
Earlier this week, the College Savings Plan Network (CSPN), an organization of state officials, produced a brochure that for the first time encapsulated a state-by-state comparison of incentives for lower-income families to place their scarce funds into college savings accounts called “529 plans” for the Internal Revenue Service code that created them. Now they’re hoofing it around to Senators and Congressional Representatives at the Legislative Conference of the National Association of State Treasurers, which is affiliated with CSPN.
It rolled out Wednesday when it was introduced to legislators on the Hill, said Joan Marshall, executive director of College Savings Plans of Maryland and former Chair of the CSPN. She currently serves as Co-Chair of the CSPN Federal Initiatives Committee.
“This is our first major effort," Marshall said. "I think you’re going to see more on this through continual effort and innovation on behalf of states.” More immediately, the group is pressing legislation to make computers an eligible 529 plan expense, allow families to put money back into 529 plans in the event of an interruption in studies, and to simplify long-term accounting.
Money and American educational crises are inextricably intertwined from public school budgets to mounting university bills. In percentage terms, the U.S. no longer leads the world in producing college graduates, as it did as recently as 1995. Instead, America trails behind 18 of 28 nations ranked by the Organization for Economic Cooperation and Development in September. In the meantime, U.S. student loan debt has ballooned to over $1 trillion.
A popular catchphrase used by those promoting 529 plans is, “A dollar saved is a dollar not borrowed.”
But in real life, the formula hasn’t proved that simple. It’s common for a family of any income level to choose retirement savings over 529 plans, because while there are more options for paying for college than there are for surviving in later years, and “you don’t want to saddle your kids with taking care of you,” said Edward Giltenan, head of global public relations for T. Rowe Price.
There is $250 billion in college savings accounts. Those nest eggs, managed by private firms under the administration of states and Washington, D.C., became political footballs when President Obama used his State of the Union address to propose taxing them. He got tackled. An immediate and hard bipartisan blowback, extending up to both House Speaker John Boehner (R-Ohio) and Minority Leader Nancy Pelosi (D-Calif), forced President Obama to retreat.
The White House’s reasoning derives from findings that only 3% of American families hold 529 plans or Coverdell Education Savings accounts and that about 70% of the tax benefits go to households with earnings of $200,000 or more. A 2012 U.S. General Accountability Office report found the program to be failing in its mission to ease the path to education for all. But the united opposition Obama faced demonstrated that the 529s aren’t just the tax hawks’ darlings.
Belonging to a 529 plan can benefit lower-income families in other ways, such as the protection from creditors some states provide. But the real societal benefit of broader participation in 529 plans might not show up on a classical economist’s ledger. Proponents instead point to behavioral economics. The very act of saving money for college, however small the contributions, may lift college graduation rates by building that expectation into family life. Higher graduation rates would then grow the economy and tax base as a whole, in their estimation.
“Just having an account earmarked is important for a child," said Regina Carmon, marketing director for the College Savings Bank, which manages plans for Arizona and Indiana. "The mindset it creates is of knowing someone is putting savings toward your future.” College Savings Bank recently launched the first Facebook app for crowdfunding, or “social gifting,” 529 plans.
A 2013 study for the Center for Social Development at Washington University in St. Louis found that a child from a lower-to-moderate income family with educational savings of even less than $500 “is more than four times more likely to enroll in college than a child with no savings account.” Bump that over $500 and that child is “about five times more likely to graduate from college” than a child from the same background with no college savings account, according to the University of Kansas and University of Pittsburgh researchers who produced the paper. Modest sums are relevant: the average 529 account holds under $20,000, would would cover less than a year of costs at a public university. And that’s among the 3% of families who bother to have 529 plans.
“Now that everyone is on the record saying college savings is so great, what are we going to do to about this 3% uptake rate?,” asked Justin King, policy director of the Asset Building Program at the nonpartisan New America Foundation. The New America Foundation is chaired by Google Executive Chairman Eric Schmidt. King favors a bold stroke that he says has the support of Sen. Ron Wyden (D-Ore.) of the Senate Finance Committee.
“I’m most excited about the idea of a national system of child savings accounts," King said. "We've advocated for a long time for the creation of a universal system of savings accounts to be opened at birth. The accounts could operate like 529s but be more flexible and accessible.”
His vision might be manifesting from New England across the country.
“First, there's an extremely important, random-controlled trial of automatically opened accounts with real money in them that's happening in Oklahoma," he said. "The early results from that trial are extremely impressive. Second, there are 529-based programs in two states, Maine and Nevada, where accounts are opened for every child in the state. An account for every child is the scale at which you're really looking at making meaningful change for struggling kids.”
Other solutions being tested state-by-state include matching grants, sweepstakes and giveaways, payroll deductions, awards and scholarships or simply free financial literacy programs. To catch kids at a young enough age to make a real positive impact, states are also entering into partnerships with youth organizations like the YMCA and YWCA and Boys & Girls Club of America, said Betty Lochner, director of Washington State’s prepaid college tuition program and current CSPN Chair.
Obama may be a lesser concern for savings advocates than lingering bureaucratic disincentives, along with distrust of the financial industry after the 2008 meltdown. Savings in 529 plans have counted against families seeking public support from programs like Supplemental Nutrition Assistance Program (SNAP, or food stamps), Medicaid, and Temporary Assistance for Needy Families.
Decision-making from a point of poverty can inhibit committing even to the small savings cited in the Center for Social Development paper.
Robin Wilson, who directs the Financial Fitness program at Urban Upbound, an anti-poverty nonprofit based across the street from New York City’s Queensbridge Houses, says a large part of the problem is that people don't know 529s exist and don't know how to access them.
"A low percentage of people coming in have a stable enough income to think about this," Wilson said. "We certainly introduce it but a lot of people are scared of the investing thing. They don’t have the confidence for it.” Two needed changes, she said, are to increase funding for financial literacy outreach efforts like hers and to raise governmental definitions for “lower income.”
Wilson is still able to steer money back to many of her Financial Fitness clients, however, through federal Earned Income Tax Credit refunds. But most clients have accounted for that relief in their household sustenance budgets, she explained.
“People usually have an idea in their mind of how to use that money already before they talk to you,” Wilson said.
—Wriiten by Erik Baard for MainStreet
This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.