(The Center Square) — College 529 savings plans are a common way to offer families tax breaks for higher education, but their benefits get heavily concentrated among the well-off.
The plans also may not be the best way to save money for the future, due to their high management fees.
“PA 529 continues to be a vital tool used by families to help save for higher education,” Pennsylvania State Treasurer Stacy Garrity wrote in the plan’s 2020-21 annual report. The report emphasized the growth in popularity of 529 plans and recommended that Pennsylvania employers should get tax credits for providing matching contributions in a 529 plan. “By virtually any metric, the program continues to excel,” it noted.
READ MORE — Pennsylvania per-student spending hits all-time high of $19,900
Pennsylvania families opened 25,074 new 529 accounts in 2020-21, a 10% increase from the previous year. The 529 program has $6.8 billion in assets — an all-time high, along with another high of $732 million contributed in one year.
The success of the program, though, benefits a small number of Pennsylvania families.
“It’s the upper-middle class that’s going to be able to take advantage of this,” said Steven Pressman, emeritus professor of economics at Monmouth University. Less-wealthy families can’t afford to save money for college in the first place, so they don’t benefit from the 529 incentives.
In his research on 529 plans, Pressman found that less than 3% of households had a 529 plan — and the majority of accounts are held by the wealthiest households. “These are people who also have a good deal of wealth stocked away … over $400,000 in net wealth for somebody who is taking out one of these savings accounts,” he said.
For those high-wealth households, the plans may not even make financial sense compared to other investment plans.
“Plans where states extract more revenue offer investment menus with higher underlying fees, weaker performance, and limited options,” Justin Balthrop and Gjergji Cici of the University of Kansas found in their 2022 research of the conflicting incentives within the management of 529 plans.
Rather than getting those fees as low as possible, states may do the opposite. “States face budgetary constraints, which might force them to view their 529 plans as a potential revenue source,” Balthrop and Cici argued.
The 529 plans were created with good intentions, but their results have been less-than-stellar for expanding access to college or making college more affordable for the average student.
Getting the federal government less involved in distorting the marketplace would be good for students, it would be good for taxpayers, and we’d get much better results.
“529s are one of the many examples where lawmakers have recognized that the tax code punishes people for things that they need,” said Matthew Dickerson, director of the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation. “The only reason that they have to exist is because our tax code punishes people for saving and disincentivizes saving and investment.”
State and federal governments could make life easier for families, but it doesn’t come from offering tax breaks to specific groups.
“What we should really focus on is fixing the tax code,” Dickerson said.
If college affordability is the goal, tax breaks for savings plans isn’t the most effective strategy.
“The best thing that could be done is to just get rid of these accounts and think about doing something like increasing the Pell Grants, which would then help the people in the middle and the bottom of the income distribution rather than the rich and near-rich,” Pressman said.
More government involvement tends to cause more problems.
“Getting the federal government less involved in distorting the marketplace would be good for students, it would be good for taxpayers, and we’d get much better results,” Dickerson said.
However, the shift would not be quick or easy.
“Once these things start, it’s just really hard to put them out of our misery,” Pressman said.
Anthony Hennen is a reporter for The Center Square. Previously, he worked for Philadelphia Weekly and the James G. Martin Center for Academic Renewal. He is managing editor of Expatalachians, a journalism project focused on the Appalachian region.
This article was republished with permission from The Center Square.
The unintended consequence of higher education funding in the form of loans and grants is the cost goes up. Politicians increase the borrowing and grant amounts and tuition goes up. If there’s more money to pay, tuition increases. Politicians pat themselves on the back for being “pro-education” and colleges increase spending, many times on non-instructional admin expenses.
lol what a joke. Since when is the right against tax breaks that disproportionately benefit wealthy elite? They certainly didn’t care in 2017 when their signature tax bill (which MASSIVELY ran up the national debt) lowered taxes for the wealthy elite but not the working class. According to GAO data the result of the Republican tax bill was:
Taxpayers with an Adjusted Gross Income (AGI) of less than $10,000 received 11.5% fewer refunds in 2018 than 2017, and the total value of their refunds was 17% less.
Those with an AGI of more than $200,000 received 45% more refunds in 2018 and the value of those refunds was 203.4% higher. Taxpayers with an AGI of $1 million or more received 216% more refunds than in 2017 and those refunds were worth 394.3% more.
Low-income individuals saw the least benefit, likely because changes to the tax rates were less pronounced at low income levels. The lowest income tax rate (10%) did not change, even though all of the other rates went down.
Income data published by the IRS clearly show that on average all income brackets benefited substantially from the Republicans’ tax reform law, with the biggest beneficiaries being working and middle-income filers, not the top 1 percent, as so many Democrats have argued.
A careful analysis of the IRS tax data, one that includes the effects of tax credits and other reforms to the tax code, shows that filers with an adjusted gross income (AGI) of $15,000 to $50,000 enjoyed an average tax cut of 16 percent to 26 percent in 2018, the first year Republicans’ Tax Cuts and Jobs Act went into effect and the most recent year for which data is available.
Filers who earned $50,000 to $100,000 received a tax break of about 15 percent to 17 percent, and those earning $100,000 to $500,000 in adjusted gross income saw their personal income taxes cut by around 11 percent to 13 percent.
By comparison, no income group with an AGI of at least $500,000 received an average tax cut exceeding 9 percent, and the average tax cut for brackets starting at $1 million was less than 6 percent. (For more detailed data, see my table published here.)
That means most middle-income and working-class earners enjoyed a tax cut that was at least double the size of tax cuts received by households earning $1 million or more.
What’s more, IRS data shows earners in higher income brackets contributed a bigger slice of the total income tax revenue pie following the passage of the tax reform law than they had in the previous year.
In fact, every income bracket with filers earning $200,000 or more increased its tax burden in 2018 compared to 2017, and every income bracket with a top limit lower than $200,000 paid a smaller proportion of the total personal tax revenue collected.