Congressmen Seek to Help the 97% of Families Without a College Savings 529 Plan
Posted By Monica Harvin on May 4, 2016 at 9:49 am
According to the GAO, just 3 percent of families use a college savings 529 plan and even fewer in the low to moderate income levels. While many in Congress focus their attentions on relieving the student loan debt crisis, some Congress Members are looking for ways to help families build up college savings, and they’re taking cues from state and local-level Child Savings Account programs, from tax benefits that reward families saving for college to savings matches and seed-funded accounts for every child.
Earlier this year, Representative Ben Ray Luján (D-NM) introduced the Save for Success Act, calling to transform the American Opportunity College Tax Credit (AOTC) into a savings vehicle for college. While in November of last year, Congressmen Joseph Crowley (D-NY) and Keith Ellison (D-MN) proposed their own college savings legislation. Both pieces of legislation aim to increase access to college for more Americans without having to rely on student debt and state or federal financial aid.
Save for Success Act would promote college savings with tax credits
The Save for Success Act introduced by Representative Luján in March aims to make the American Opportunity Tax Credit a tool for both promoting college savings and helping families with college expenses. Currently, the tax credit allows families with college expenses to receive a $2,500 tax credit during each of the first four years of undergraduate studies, up to $10,000 total. However, this occurs after the college expenses have already been paid for, making it less impactful for college success as well as creating financial hardships for low and middle-income families that have to pay for college expenses upfront.
Congressman Luján’s Save for Success Act would create an incentive for families to save for college in advance by allowing families to claim up to $250 of the AOTC each year they save for their child’s future college education. For example, a family that starts a 529 plan for a child and deposits $200 would qualify for a tax credit of $200 that year. When the child goes to college, she can use the savings and any accumulated interest to pay for qualified college expenses.
“By advancing AOTC eligibility, families will be encouraged to save for college and benefit from the growth in savings over time. While the size of the AOTC does not change, a family that maxed out this credit starting at the birth of a child and invested it in college savings would use $4,500 of the AOTC and have nearly $15,000 saved by age 18, assuming a modest 5 percent rate of return. The family would still be eligible for the remaining $5,500 of the tax credit,” explains the press release from Rep. Luján’s office in announcing the Save for Success Act.
Making families eligible for the AOTC earlier could make saving for college easier for low-income families. “This legislation will help offset the rising cost of a college education, by delivering real-time payments that will make a direct and immediate impact on working families’ checkbooks,” said Claire Dudley-Chavez, Executive Vice President for Policy and Stakeholder Engagement at United Way of Santa Fe County in the press release. What’s more, research that shows that low and moderate-income students with at least $1-$499 in college savings are three times more like to go to college and four times more likely to actually graduate, compared to their peers without college savings.
USAccounts Act would mean $500 in college savings for every child
Taking cues from Child Savings Account Programs that provide universal seed-funded accounts to kindergarteners and/or newborns in places like Maine, Massachussetts and San Francisco, Representatives Joseph Crowley of New York and Keith Ellison of Minnesota introduced the USAccounts: Investing in America’s Future Act of 2015 last November. This legislation would establish a fund in the US Treasury to provide every child born after December 31, 2017, with $500 in seed-funded college savings.
The Investing in America’s Future Act also calls for a 1-to-1 match on contributions made by families in the lowest income levels, up to $500 annually per USAccount. To further incentivize college savings, the bill would provide for an additional match through the Child Tax Credit, where families that make contributions to their child’s account would receive a matching amount as a tax credit, up to $500 per year. Distributions from these accounts would be tax-exempt if used for higher education expenses or funding individual retirement accounts, and families would be able to contribute up to $2,000 per year to their child’s account.
After college or once the child is no longer a dependent, remaining funds would be rolled over to an IRA to allow individuals to continue to save for retirement or to use penalty- and tax-free to buy a home, start a business or pay for medical expenses. Though whether the legislation will pass is still unclear, Carl Rist, director of children’s savings and senior advisor for asset building at the Corporation for Enterprise Development, tells GoodCall that creating such universal access to college savings at the national level “would be a homerun for Child Savings Accounts.”
As legislators continue to look for ways to help make college more affordable and more accessible to students of all economic backgrounds, and with the looming student debt crisis in the minds of many, it’s likely that proposals like the Save for Success Act and USAccounts will draw more attention as important ways for promoting college savings from an early age, avoiding student loan debt and countering the effects of state budget cuts to higher education.