The recent debate over the Obama Administration’s proposal to end the tax breaks for 529 college education savings plans has missed an important point about the programs – while they have not gained the popularity that they should have for more middle-class families, they are an example of a successful asset-building program that should be extended, not phased out.
While the Administration has withdrawn the current 529 proposal, the debate over the program is sure to continue, and many parents may be dissuaded from enrolling due to the perception that the program will be in political jeopardy, and may be a target for tax savings in the future.
Most discussions of asset building focus on poor or working-poor populations. The program that we run in Ypsilanti, allows residents of a subsidized housing program to save earned income towards home purchase, higher education, or starting a small business. Residents are able to save earned income and be matched by a federal grant, as well as a local match, for a total of 2:1. This is designed to encourage participants to set long-term goals, save over time towards those goals, and then achieve them.
These programs help participants with workshops and counseling, and can provide a needed boost towards reaching long-term goals. A year into the program, we have already had our first successful graduate, who saved his income towards taking classes at Washtenaw Community College and Eastern Michigan University, where he walked at graduation this past December.
As studies have shown, many Americans are as asset poor as the participants in our Individual Development Account program. The most recent CFED Assets and Opportunity Scorecard shows that 44% of U.S. families are liquid asset poor, meaning that an emergency expense would leave them without the funds to pay for basic needs. This lack of assets is not limited to poor people, but cuts well into the middle class, where the loss of housing values has meant that financial tools such as home equity loans, which could pay for expenses such as college, are no longer an option for many families.
529 plans serve as an asset building tool for families to save for college education. Like an IDA program, they allow parents and grandparents to set a goal, and set aside money regularly toward it. The management of 529 plans in many states is exceptional – the Michigan 529, managed by TIAA-CREF, is a model of high quality/low fee management, and the investment model reduces the risk level as the child gets closer to college automatically. This gives families a model of how to work toward a long-term financial goal, a lesson that they could then apply to other areas (such as retirement).
All of our research and experience in asset building would tell us that without a dedicated account for college savings, particularly one with tax advantages, parents would not save the same amount toward college, but instead the money would be spent on the pressing needs and wants of the present moment. The Administration’s phasing out of an asset building program in exchange for tax credits shows a lack of appreciation for the lessons that people learn in asset building efforts that they will not learn by simply getting a larger tax refund.
There are many ways that 529 plans could become more attractive to parents with lower income than presently use them. States, in particular, could provide seed funding for accounts, and could return to the matching programs that once existed for contributions to 529s. The president and governors could do more to highlight and spotlight the importance of savings towards a goal, particularly one such as higher education.
But to propose elimination of these programs at a time when they are needed, and could be a bigger part of a solution to American families’ lack of assets, is a missed opportunity to help many Americans learn valuable lessons about asset building at a time when they are more needed than ever.