College 529 Plans

A 529 college savings plan is a very simple way to save money for your childs' (or anyone else's) college education. The 529 plan is a state-sponsored investment program. That is, the state sets up the plan with an asset management company of its choice, and you open a 529 account with that asset management company according to the state's predetermined plan features. You are the owner of the account, and the child for whom the account is set up is the beneficiary. You will not deal directly with the state, but rather with the asset Management/investment Company. Here are some benefits:

• You pay no taxes on the account's earnings.

• The child does not have control of or access to the account -- you do.

• If the child does not want to go to college, you can roll the account over to another family member.

• Anyone can contribute to the account.

• There are no income limitations that might make you ineligible for an account.

• Most states have no age limit for when the money has to be used.

• If the child gets a scholarship, any unused money can be withdrawn without paying any penalty (just the tax).

Concerns for People with Low to Moderate Incomes

• Under existing 529 rules, households that do not use their 529 funds for higher education expenses face a 10 percent penalty on accumulated earnings and must generally pay income tax on the withdrawal.

• Some 529 providers assess high administrative fees- be sure to shop around for the most competitive rates. Most states do not have residency requirements, which allow for even greater flexibility.

• Many states exempt 529 plans from financial aid calculations. Federal financial aid tests exclude all assets (including 529 savings) from consideration if (1) the family is not required to file an IRS 1040 (i.e., meets the requirements to file a 1040A or 1040 EZ) and (2) income is less than $50,000 (U.S. Department of Education, 2003).

• Some 529 plans require low minimum contributions, which makes the accounts more attractive to low-income families. However, many other 529 plans require more significant minimum investments. For example, the plans managed by TIAA-CREF allow accounts to be opened with as little as $25 in contributions; the plans managed by Fidelity require a minimum contribution of $1,000

Increasing Inclusivity of 529 Plans
According to the Center for Social Development's research paper " College Savings Plans: A Platform for Inclusive Savings", there are several areas in which states are pushing for more inclusive 529 plans:

Outreach.
Many states are trying to reach a broad population. Outreach activities vary by state. The most often-used methods to communicate are through television, radio, and print advertisements. Efforts to reach wide segments of state residents include inserting 529 plan information with mailings for birth certificate and motor vehicle registration, and distributing information via school systems, libraries, and day care centers.

Minimum deposit requirements.
A majority of plans require very low minimum contributions. In many states, accounts may be opened with a $25 check, money order, electronic funds transfer, or with as little as $10 through an automatic plan deposit.

Workplace enrollment.
Extensive efforts are made for workplace enrollment. Ninety-five percent of states surveyed agree or strongly agree that efforts to introduce 529 savings plans in the workplace provide opportunities to reach participants of all incomes. Some states report that their initial workplace enrollment was to introduce the plan to state and local government employees, and then they expanded efforts to other employers.

Scholarships.
Twenty-two percent of states provide scholarships through their 529 savings plan. Many of these are designed as creative outreach efforts. One state combines both scholarship and need by awarding "one hundred $10,000 4-year scholarships ($2,500 per year), to students with lowest the EFC 8 and highest SAT scores."

State financial aid.
Many states (44%) exclude the value of 529 savings plan accounts from calculations for state financial aid.

Match for low to moderate-income savers.
Currently, five states offer a savings match within their 529 savings plans. Rhode Island and Maine, for example, allocate user fees from national accountholders in 529s to fund a savings match for low to moderate-income state-resident families. Three other states, Michigan, Minnesota and Louisiana, provide a savings match through state appropriations.

Links to 529 savings plans through Individual Development Accounts (IDAs).
Other states are providing links to 529 savings plans through IDAs. For example, using the 529 savings plan account as the IDA savings vehicle, Vermont offers a savings match to low-income 529 savings plan participants.

In sum, the states are leaders in innovation for inclusion in 529 policy. Through 529s, states are in the forefront in commitment and creativity for inclusion in asset building. No other major asset-based policy is characterized by as much innovation for inclusion.

See our Resources section for more information.