David Dulberg
October 2018

Preparing For Your Kid’s Education in a 529 Educational Savings Plan is Good For Everyone, Right?

Don’t want your kid to have to take on the same amount of student loan debt you did? Of course you don’t. So you’re saving for your child’s education in a 529 educational savings plan? That depends.

Some parents were already saving at a record pace, from 2010 to 2017—savings in 529 plans increased by 81 percent. Now, with an expansion of this educational savings program in the Tax Cuts and Jobs Act to include limited access to saved funds for K-12 expenses, savings are predicted to grow much, much higher.

More equals better, when it comes to college savings, right? Like so much having to do with student loan debt, it may be a little more complex than that.

Of Course, Saving Is Good

Certainly, saving is proactive. It funds possible future shortfalls and can lead to lower, or even zero, debt. Also, paying with tax-free savings has a double benefit compared to getting a loan. Loans cost you money, whereas savings that are not taxed actually add value to your money.

So tax breaks on savings accounts for post-secondary (and now primary and secondary) education for the families who are able to do so is a great benefit. Unfortunately, according to the Government Accountability Office, less than 3 percent of families saved in a 529 plan.  Families with these accounts had 25 times the financial assets of those without. They also had about 3 times the income. In addition, the percentage of those who used 529 plans with college degrees was about twice as high as those who did not.

So, in some ways, for many — maybe even for most of those utilizing 529 plans — they would already be able to afford paying for their children’s education. The 529 plan incentivizes those who are less in need of an incentive.

And those funds have really jumped this year. Americans had already saved more in the first half of 2018 than they did in all of 2017, which was the year of greatest 529 savings ever. This is due to expanding the program to include those more limited K-12 benefits—$10,000 per year for qualified expenses.

Lost Revenue

Though it remains crucial for people seeking to stave off student loan debt for themselves and their families, a Pew study suggests that governments are giving up too much revenue through 529 education plans. For federal funds in 2017, this adds up to $2 billion in lost revenue. College saving plans are also taking money away from states. California estimated that it will forego $57.5 million in 2019 in tax dollars due to the savings plans. Pennsylvania estimated it will give up $32 million. And these estimates did not include increased revenue loss due to the K-12 expansion of 529 programs.

What can be done?

Americans must decide if 529 plans are mainly for working class families who are doing everything they can to prepare for their children’s education, or if they are tax breaks for those already doing well. If it is determined the status quo is workable, then we do nothing. If not, we can either incentivize those from lower economic rungs, perhaps allowing money to be taken out before being taxed, similar to a 401(k), or reduce the benefit of those in higher income tiers.


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David Dulberg

David Dulberg lives with his wife in the coastal hills above a narrow creek, mid-canopy in a redwood forest. He has been writing for non-profits for many years, and volunteers as a pilot on the Baum Squad, a tandem bike riding program for the Earle Baum Center for the Blind. He does not have a pet. This does not make him a bad person.

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