Higher Education

As the cost of college increases, more families are saving for it

529 plans are getting larger, but can they cover college costs?

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There’s been a sharp increase in the number of 529 college savings accounts, and the size of these accounts is also growing, according to an October report from the Pew Charitable Trusts.

But that’s not happening quickly enough to offset the staggering cost of higher education.

A 529 plan is a state-sponsored savings account typically used for higher education costs, such as tuition and room and board. The Tax Cut and Jobs Act of 2017 expanded the use of these plans to cover kindergarten through twelfth grade expenses.

Between 2010 and 2017, there was a 30 percent increase in the number of 529 accounts, which now total 13 million, according to the Pew report. Over this same period, the average amount in each account rose to $24,057 — a 39 percent increase.

Having a nest egg of this size for college can certainly trim costs, but it likely won’t prevent students from having to rely on financial aid, scholarships and jobs to pay for school.

Tuition, fees, and room and board went up by 34 percent at public colleges and universities between the 2005-2006 and 2015-2016 school years, according to the National Center for Education Statistics. At nonprofit private schools, the increase was 26 percent.

Last school year, the average cost of attending a four-year public institution was $9,970 for in-state students and $25,620 for out-of-state students (not including room and board); at private institutions, it was $34,470, according to the College Board. And many students aren’t completing the Free Application for Federal Student Aid, which takes them out of the pool for federal aid and grants.

Bottom line: The average amount in a 529 account won’t make a huge dent in reducing school fees, especially when it takes many students six years to graduate. But it can cover some of the costs, particularly for those students who attend an in-state school.

Meanwhile, lawmakers are looking to further expand the uses of 529 plans. In September, the House Ways and Means Committee passed the Family Savings Act of 2018, which would allow college graduates to use 529 plans to cover student debt.

The Heritage Foundation, a right-leaning think tank, wants lawmakers to take additional steps: changing the rules for 529 plans to allow families more school choice at the K-12 and help them pay for a bevy of other options.

“Federal lawmakers should expand the uses of 529 savings plans to include personal tutors, education therapy, online classes, textbooks and curriculum, apprenticeship programs, and job-training expenses,” wrote Lindsey Burke and Jonathan Butcher in a 2017 Heritage Foundation report. “Moreover, individuals who choose not to attend college could save in a 529 plan for K–12 uses and then use some of their savings for job-training and apprenticeship opportunities.”

Several education policy experts, however, says these plans — regardless of how they’re used — are flawed. For one, 529 plans can be costly for federal and state governments, according to the Pew report. Plus, others say, 529 accounts widen the inequality gap between the haves and have nots because of the tax breaks that come with using these plans.

“Affluent families reap almost all of the benefits from the federal tax incentives,” wrote Richard Reeves, a senior fellow at the Brookings Institution, and Nathan Joo, a senior research assistant at the institute, in a 2017 report. “Currently, any capital gains or dividends produced by 529 savings plan investments are not taxed. This provision almost exclusively benefits the seven in ten families with 529 plans who have six-figure incomes, because lower-income families are not liable for taxes on capital gains and dividends.”

This story about 529 plans was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education. Sign up for the Hechinger newsletter.

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Delece Smith-Barrow

Delece Smith-Barrow is a senior editor for higher education at The Hechinger Report. She was a 2017 Knight-Wallace Fellow at the University of Michigan, where… See Archive

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