The 529 plan is no way for the poor and middle-income segments of the population to save up for college — in fact, they're really designed to be of more help to those who make more money.
So says a report on the Huffington Post, which adds that not only do 529s benefit higher-income families more than those who make less, they're little known among those on the low end of the income spectrum and too complicated for them to manage.
The report, originally published on The Conversation and written by Robert H. Scott III, associate professor of economics, Monmouth University and Steven Pressman, Professor of Economics, Colorado State University, points out the need for a college degree and the million-dollar earnings difference over the course of a lifetime it represents drives people to pursue a higher education.
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But when they do that, most are pursuing a debt load that will in turn pursue them for much, if not most, of their lives. The cost to pursue a four-year college degree is rising 2 percent to 3 percent per year more than the overall cost of inflation, making the amount of outstanding debt increase 176 percent over the past 10 years. That has translated into a record level of student debt: $1.44 trillion as of March, amounting to approximately $33,000 per borrower and more than double what it was in 2008.
The impact of all that debt isn't just on the borrowers; it's on the economy as a whole, translating into "credit-ruining defaults and significant financial stress to impairing the ability to save enough to buy a home or retire," the report says. In addition, it points out that "[m]oney spent repaying these loans means less consumer spending, thus slowing economic growth." So it's in the economy's best interest to solve the problem.
But 529s aren't the solution, it says. Half of the families trying to save for college don't even know 529 plans exist, it says, and among those who do, most don't understand them. Lower-income families that can't afford to invest would have a tough time navigating the complexities of the investment options in 529s.
And that's for openers. Another disadvantage of 529s for those folks with low incomes is that most of their benefit comes from tax breaks — something that's hardly more than a dream to people who don't make enough to pay much in taxes in the first place.
Then there are other drawbacks. Not using the money in a 529 to pay for college expenses will result in tax penalties, while having the money in the first place will count against the family when it applies for financial aid.
So who benefits from 529s? Upper-income families, mostly; the report says just "0.3 percent of households in the bottom half of the income distribution (under $56,516 in 2015) have 529 accounts, while 16 percent of the top 5 percent do." In addition, 529s actually cost the government a big chunk of change: $2 billion annually in lost tax revenue to help out folks who mostly don't need the help.
So what's to be done, according to the authors? Instead of helping wealthier families and "the financial industry (via the high management fees)," they suggest boosting the amount of Pell Grants and making tuition free. That will have a real impact on those lower-income households, they say — the people who need that help most of all.
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