| January 16, 2013

Give parents a head start on saving for college

I’ve often argued that public policy should encourage and reward parents, who, after all, contribute mightily to the common good by producing and maintaining human capital. Parents face countless challenges on the journey, as they worry about their children’s health and safety, education, moral formation and much more. As a father with one child in college and another in diapers (and three more in between), I can assure you that college affordability is a subject often on my mind.

One investment vehicle used by many parents is the 529 college savings plan. Unfortunately, Susanna Kim of ABC News reports (“Federal College Savings Plan Primarily Helps the Wealthy, Study Finds”) that “a federal plan meant to help families save for college tuition is overwhelmingly benefiting wealthy families, a federal review has found.” According to that December 2012 report from the U.S. Government Accountability Office (GAO):

A small percentage of U.S. families saved in 529 plans in 2010, and those who did tended to be wealthier than others. According to the Survey of Consumer Finances (SCF), less than 3 percent of families saved in a 529 plan or Coverdell Education Savings Account (Coverdell)—a similar but less often used college savings vehicle also included in the SCF. While the economic downturn may have reduced income available for education savings, even among those families who considered saving for education a priority, fewer than 1 in 10 had a 529 plan (or Coverdell). Families with these accounts had about 25 times the median financial assets of those without. They also had about 3 times the median income and the percentage who had college degrees was about twice as high as for families without 529 plans (or Coverdells).

If we want more lower- and middle-income parents to start piling up money in 529 plans, a new vehicle called Education Savings Accounts can help. As James Marshall Crotty points out over at Forbes (“Can Education Savings Accounts Level The Playing Field For All American Students?”):

Passed in 2011, Arizona’s one-of-a-kind Empowerment Scholarship Accounts enable parents of children with special needs to opt out of public or charter schools and receive 90 percent of their dedicated state funds into an account accessed through a use-restricted debit card. Those funds can be used to purchase services from qualifying online education providers, private schools, tutors, textbook providers, and licensed or accredited education therapists. Critically, parents can invest unused dollars (up to $2,000 per child per year) in federally approved college savings plans (which have more flexible investment options, including mutual funds). This latter reform—a first for the school choice movement, which has historically focused on K-12 schooling—motivates parents to carefully manage each penny when picking an education provider. This, in turn, reduces cost inflation from third-party providers (another feature that vouchers lack). …

Moreover, as parents better monitor and distribute their dedicated public education funds, they will have more money to pay for their children’s secondary and college education. Such additional revenue streams could also level the playing field in secondary and college admissions, as poor and middle class parents will be able to afford the private K-12 tutoring, coaching and test prep services currently reserved for wealthier families.

Eligibility in Arizona has since been expanded beyond the special-needs population; today fully one in five Arizona students is eligible for an ESA. In Oklahoma, I’d like to see (for starters) ESAs for preschoolers. For parents who choose not to enroll their child in government preschool, the state portion ($3,461) of that child’s per-pupil expenditure would be deposited into an ESA. This would give parents a head start (heh)—one whose benefits would accrue rather than fade.

Cross-posted at

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