529 plans

Last Thursday, New America's College Savings Initiative held an event in tandem with the Congressional Savings and Ownership Caucus to discuss ways for federal policymakers to encourage saving for postsecondary eduation.

The Importance of College Savings

There is strong evidence that attaining a college education is one of the best ways for low- and moderate-income students to climb the economic ladder.

This weekend, I was fortunate to have a piece in the Des Moines Register on the need for policymakers to help familes save for higher education. In it, I argue that barriers to college savings need to be removed (in both financial aid and public assistance calculations), and savings need to be augmented for low-income families who have the toughest time putting money away for college. From the op-ed:

Just last year, tuition and fees at four-year public colleges rose 6.5 percent. Unfortunately, this continues a decades-long trend of rising college costs, even during periods of economic unease and low inflation. Escalating prices have also coincided with stagnation in need-based financial aid availability, the result of which has been mounting levels of student debt for low and middle-income families. In this context, there has been greater reliance on savings, particularly through 529 college savings plans, in order to increase college affordability and reduce debt.

But there is also an emerging body of research linking savings to important educational and behavioral benefits, as well as college completion.

The Obama Administration has indicated that saving, broadly, will help lay a new and sustainable foundation for economic growth, and that saving for college in particular can help America regain its global education lead. How can college savings plans be reformed to help achieve these goals, particularly for low and moderate income families? What has the Obama Administration learned from its recent review of 529 plans? How are states, through their 529 plans, helping families combat the rising cost of higher education? And how are families actually saving for college, given the current economy?

Join the New America Foundation's College Savings Initiative this Thursday, November 5th, for a discussion of these questions and more, featuring Alan B. Krueger, Assistant Secretary for Economic Policy at the U.S. Treasury Department. This event will also feature commentary by Dan Ebersole, State Treasurer of Georgia, Margaret Clancy of the Center for Social Development at Washington University in St. Louis, and Scott Buchanan of Sallie Mae.

A live webcast of the event can be seen on the event page.

• Only 32% of low-income families (those making under $35,000 a year) have saved for college. By contrast, 62% of all families have saved for higher education.
• The current economy is impacting college savings behaviors. For example, 36% of low-income families are saving less for college than before. Only 5% are saving more.
• Families making under $50,000 who are currently saving for college put away, on average, larger amounts than those making between $50,000 and $150,000.
• Families making under $50,000 annually save 7.5% of their income for college, on average. By comparison, the average college savings rate among all income levels is 3.6%.
• In order to reach estimated "savings goals," low-income families need to save nearly 10% of annual income until a child reaches college. On the other hand, families of all income levels only need to save 5.7% of annual income to reach their savings goals.
• 529 college savings plans are the third most popular savings vehicle for college - with one-third of all families using them.
• Only 4% of low-income families consider themselves "very familiar" with 529 college savings plans. A whopping 75% were "not at all familiar."

What are the key takeaways from this survey? And how can we apply these findings towards enlightened federal policy?

Yesterday, Vice President Biden took his Middle Class Task Force world tour to Syracuse University to discuss college access and affordability. The forum's all-star lineup also included Treasury Secretary Tim Geithner and Education Secretary Arne Duncan.

The event coincided with a report from the Treasury Department on the effectiveness of 529 college savings plans (full disclosure: New America, through the College Savings Initiative, is mentioned as a resource multiple times). You can read Treasury's observations and recommendations here.

More interesting however, was Secretary Geithner's full-throated support of saving broadly -- and saving for higher education in particular -- as a means to close achievement gaps and regain America's footing as a global education leader.

While I usually leave it over to our friends at Higher Ed Watch to discuss the latest hullabaloo in the world of student loans, something in today's Wall Street Journal stopped me on a dime. From WSJ: 

New numbers from the U.S. Education Department show that federal student-loan disbursements-the total amount borrowed by students and received by schools-in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion. 

Gulp. For many families, financing higher education without piling on too much debt was already a steep proposition. Like everything else post-financial crisis, it's gotten even more difficult. Job losses, home equity losses, market swings, stagnation in federal aid, state budget strains, and tuition increases have resulted in increasing uncertainty and hopelessness over household budgets, and a dramatic spike in the amount of money students are borrowing for college. Much can be blamed on the economic mire in which we find ourselves. But the point remains: many students and families are taking on unsustainable levels of debt, and it's affecting important life decisions. And in turn, it's affecting our ability to jumpstart the economy.

Before a long Labor Day weekend of despair sets in, however, this author offers hope to drink in: There are ways for Congress, the Obama Administration, States, and the financial industry to collaborate and give families a way to escape crushing levels of debt. The tonic? Targeted and meaningful savings incentives.

The state of Illinois recently passed a bill, SB 77, creating a state income tax credit for employers making matching contributions to their employees' 529 college prepaid and savings accounts. The credit is a 25% match of the employee contribution, not to exceed $500 per employee.

Note: This post was originally published on Higher Ed Watch, New America's commentary on the world of higher education, run by the Education Policy Program.

Recently, 529 college savings plans have come under criticism. Like many stakeholders in the economy, 529 plan owners have not been isolated from financial pain, and many critics have used recent market volatility and plan underperformance to call for reform. Others, however, have gone further and called for policymakers to abandon 529s in particular, and savings overall, as a plausible conduit to help families afford college. As New America's recently launched College Savings Initiative is charged with examining and improving 529 plans, we feel that it is important to respond to some of these arguments.

To their credit, many critics of these plans share our general goal -- to increase postsecondary access and affordability for low- and middle-income students. We simply differ over whether or not 529 plans provide a promising tool for helping students attend and complete college who could not otherwise afford to go.

Consider this: A recent Gallup survey from Sallie Mae indicates that, while 62% of parents are saving for college, only 32% of those making less than $35,000 have put any money aside for this purpose. Furthermore, half of those low-income families are saving even less (or in some cases not at all) in light of the recession. This is, quite obviously, cause for concern. But is encouraging savings -- and college savings plans as vehicles to do so -- really the answer? We believe so.