CFED Assets & Opportunity Scorecard
College Savings Incentives
Postsecondary education is one of the best investments an individual can make in his or her economic future. One way to make post-secondary education more affordable and increase participation by lower-income individuals is to create incentives for them to save for college in tax-free 529 college savings accounts. Incentives can take many different forms, including: automatically enrolling all children in 529 accounts; seeding accounts with an initial deposit; providing direct dollar-for-dollar matches or state income tax credits for continued contributions; and offering no-fee and no-minimum deposit investment options for low-income savers.
CFED evaluated the strength of each state’s policies to incent college savings against the four criteria described in the Elements of a Strong Policy tab.
CFED uses the following icons to denote the strength of state policies:
Strength of State Policies: College Savings Incentives
|Does the state minimize barriers to saving? (must offer both to receive credit) 3|
|State||Does the state automatically enroll all children in 529 plans at birth? 1||Does the state incent savings for some or all residents? 1||Is there the potential for an account balance of at least $9,573 at age 18? 2||No-fee option?||No minimum deposit?||Rating|
|District of Columbia||No||No||—||No||No|
|New Jersey||No||Yes||No ($6,583)||No||No|
|North Dakota||No||Yes||No ($4,167)||No||No|
|Rhode Island||No||Yes||Yes ($9,877)||No||Yes|
|Texas 8||No||Yes||No ($5,252)||No||No|
|Utah||No||Yes||Yes ($12,734)||Yes||Yes; but requires $100 minimum deposit to receive match|
|West Virginia||No||Yes||No ($7,683)||No||No|
1. Data gathered from each state's 529 plan website.
2. CFED analysis. Assumptions: Accountholder is part of a two-adult family of four living at 200% of the 2012 federal poverty line ($46,100). Account is opened at birth and grows until age 18. Accountholder's family saves 0.9% of income annually ($415 per year) for as many years of incentives as are available (0.9% was the average savings in the American Dream Demonstration for families at this income level). If the state limits matching funds available per person to an amount that is less than $415, we assume that the family saves up to the amount of the match cap for as many years of incentives as are available. All accounts earn 3% interest annually. Threshold figure of $9,573 determined by projecting forward current cost of two-year public college tuition and fees ($5,926) by 2.7% per year (average annual increase in tuition prices over the last decade). CFED analysis derived from College Board's 2011 Trends in College Pricing Report. Note: "-" indicates that the data is not applicable because the state does not currently incent college savings.
4. Illinois employers may claim a credit against taxes for 25% of matching contributions made to an employee's account in an Illinois 529 plan, with a maximum annual credit of $500 per employee.
5. Michigan suspended its 529 matching grant program in 2009 as a result of budget cuts.
6. Minnesota eliminated its matching grant incentive as part of a budget compromise in July 2011. For years prior to 2011, a 15% or 10% matching grant of up to $400 per year was available to Minnesota residents, subject to income limitations.
7. Tennessee launched a new 529 savings plan in September 2012. The state's 529 plan had previously been closed to new enrollment since 2010.
8. In September 2012, the Texas Match the Promise Foundation launched an initiative to provide matching scholarships to participants in the Texas Tuition Promise Fund, the state
9. Washington does not offer a 529 college savings plan, but it does operate a unit-type prepaid tuition program (GET) for state residents.
WHAT STATES CAN DO
Each state offers its own 529 plan – whether as a prepaid tuition plan, a college savings plan or both – through a designated investment manager. While plans vary state to state, each plan includes the following features: public sector oversight that allows incentives and coordination with other policy efforts; centralized accounting functions; a limited number of investment options; and the ability to cross-subsidize between large and small accounts.1
States have the flexibility to design many features of the plan, including whether to offer financial incentives to encourage participation. States can also make saving easier – especially for low-income families – by automatically opening accounts for all newborns, offering a no-fee investment option (for college savings plans), and requiring low minimum deposits (or credit purchases for prepaid plans). On an ongoing basis, states can also gauge participation levels for various demographic groups by tracking and publicly reporting account ownership by income, race and other demographic characteristics.
State incentives for low-income families to save in 529 accounts can take many different forms. However, the most effective are those that seed accounts with an initial deposit; provide a direct dollar-for-dollar matches to deposits or a state income tax credit for continued contributions; and offer no-fee investment options for low-income savers.
WHAT STATES HAVE DONE
Overall, 15 states currently incent deposits into 529 college savings plans for some or all of the state’s children. Thirteen have enacted matching grant or scholarship programs (Arkansas, Colorado, Kansas, Louisiana, Maine, Missorui, Nevada, New Jersey, North Dakota, Rhode Island, Texas, Utah and West Virginia).2 Three offer tax credits based on a percentage of 529 contributions (Indiana, Utah and Vermont). Utah offers both types of incentives.
1 Margaret Clancy, Peter Orszag, and Michael Sherraden, College Savings Plans: A Platform for Inclusive Saving Policy?, (St. Louis, MO: Washington University, Center for Social Development, 2004), http://gwbweb.wustl.edu/csd/Publications/2004/Perspective-529andInclusion.pdf..
2 Michigan discontinued its matching incentive in 2009, while Minnesota eliminated its matched savings program in 2011. Tennessee has announced that it plans to introduce a matching grant program, but has delayed implementation because of funding issues.
ELEMENTS OF A STRONG POLICY
Based on research by CFED, the Center for Social Development, the New America Foundation and others, CFED considers a state’s college savings incentive policy strong if it meets the following criteria:
1. Are accounts automatically opened for all children at birth? States should automatically enroll all newborns into their 529 plans.
2. Does the state incentivize 529 college savings for low- to moderate-income residents or all residents? States should provide a match or tax credit on college savings for as many children aspossible, but at least for children in families with low and moderate incomes.
3. Is there potential for meaningful account balances after 18 years? States should design incentives so they result in meaningful savings (or number of prepaid units) by the time most young adults are ready for post-secondary education. Although college costs continue to increase rapidly, savings accumulations of $9,573 would pay for at least two years worth of tuition and fees at a public two-year college 18 years in the future.1 Therefore, for the purposes of this policy measure, an account balance of at least $9,573 at age 18 is considered “meaningful.”
The potential for a meaningful account balance (or number of prepaid units) after 18 years is influenced by whether a state makes an initial deposit (or prepaid credit purchase) to seed the account, the amount of that deposit/credit purchase and the structure of state matches or tax credits for individuals’ deposits/credit purchases. The presence of a state match or tax credit and its rate and duration will greatly impact the final balance for an account.
4. Does the state minimize barriers to saving? Recent research on 529 savings behavior among low-income families has revealed that small changes to program structure can greatly increase savings and participation rates. States should ensure that saving is as easy as possible, and that accountholders’ investments are not whittled away by high fees and service charges. To do so, states should ensure that:
- Small deposits are permitted. Many 529 college savings plans have a minimum deposit requirement (often $15 to $25), which can be a barrier for very low-income families who may only have a few dollars at a time to deposit. States should allow deposits of any size to 529 accounts, no matter how small. Similarly, states should not mandate minimum credit purchases for prepaid plans.
- The college savings plan offers a no-cost investment option. States should minimize fees and service charges in their 529 plans, and should offer a basic investment option with no fees for enrollment, account maintenance, program management or other investment costs.
To see how each state’s policy stacks up against these criteria, see the State Data tab above.
1 Threshold figure of $9,573 determined by projecting forward current cost of two-year public college tuition and fees ($5,926) by 2.7% per year (based on average annual increase in tuition prices over the last decade). Data derived from Sandy Baum and Jennifer Ma, “College Board’s 2011 Trends in College Pricing Report,” http://trends.collegeboard.org/college_pricing/
MAKING THE CASE
Six Guidelines for a Successful Campaign
1. Find your allies. Seek support from colleges, universities and other post-secondary education stakeholders. Post-secondary education advocates and providers have a range of their own policy priorities for improving college access, affordability and attainment. The state financial aid agency and the larger financial aid practitioner community are also important allies. It is critical to get all of these players on board as supportive of your efforts. Finding a champion in the post-secondary education community who will vocally support matched 529s is invaluable. One strategy for bringing these stakeholders on board is to reference a recent report from the College Board, which makes a range of recommendations for improving the federal student aid system, including creating a new kind of college savings accounts.
2. Engage and recruit influential employers to serve as advocates and/or spokespersons. Private employers can play a key role by convincing legislators that college savings incentives make good business sense. In particular, private-sector employers can collaborate with the public sector to establish employer sponsored matching programs that can complement or enhance state-administered programs. Additionally, employers serve as another critical access point to enroll state residents and can make the case that such incentive-laden programs are beneficial for employee recruitment and retention.
3. Build relationships with policymakers. Advocates should engage a broad range of agencies that can support the concept of incenting savings for college accounts. Many state bureaucracies– including human services, foster care, workforce, K-12, higher education, banking, commerce/economic development and the comptroller/treasurer – can prove valuable allies. Support from state agencies demonstrates a baseline of participation to promote college savings accounts and to enroll families into a state-sponsored college savings plan, especially with attractive incentives for working families. As early as possible in the advocacy process, stakeholders also should identify, recruit and secure commitments from a state agency that would be well suited to take on the administration of the matched 529 program.
In the legislature, finding a champion (or champions) is key. Identifying the right candidate to take the lead is critical; one or two powerful legislators can often move a bill forward nearly single handedly. Incented 529s, and children’s savings accounts more broadly, have the advantage of being generally perceived as a non-partisan issue. At the federal and state level, there are examples of many Republican and Democrat pairs cosponsoring children’s savings legislation. An argument to use to make the case to conservative policymakers is that incenting savings in 529s represents a market-based strategy that embodies a public-private solution to the widely shared problem of college affordability and attainment.
4. Identify creative funding solutions. The current challenging budget climate in many states means that advocates must think creatively about where to find resources to fund a 529 match or other incentive. Many competing priorities and shrinking revenues mean that dedicated funding is more difficult than ever to secure. However, lack of dedicated funding should not deter the opportunity for positive policy change, as the dollars may be appropriated only after a sound framework has been designed. Notwithstanding the current budget situation or appropriations cycle, advocates should generally settle on the desired set of savings incentives, and pursue funding options concurrently or following the enactment of the policy change. Aside from general revenue, advocates should pursue other potential sources of funding. These include the 529 account (administrative) fees, unemployment insurance trust fund surplus revenues and other special funds, such as tobacco settlements, oil/gas revenues and unclaimed property revenues.
Another potential strategy is to identify revenue generators that also address structural tax policy shortcomings, such as passing a sales tax on services, implementing an “Amazon law” to ensure that consumers pay taxes on internet purchases, or increasing personal income taxes on upper-income taxpayers. Closing these tax loopholes can be a challenging process and often generates strong opposition – but has the potential to generate substantial amounts of revenue.
Finally, advocates should be willing to take one-time or start-up funding to get a program going. Some policymakers may be skeptical that the initiative will work; beginning with a pilot allows advocates to demonstrate success and build the case for future investments. A pilot can be launched with modest funding; for example, just $250,000 was enough to get the program started in Arkansas.
5. Consider a state commission or task force as a first step. An incremental step that can be an important tactic in gaining support for a matched 529 policy is to create a study commission or blue ribbon task force to examine the policy proposal. This strategy can raise the visibility of a matched 529 program and secure a high-level of support, especially when the concept of a matching grant is relatively new and political support uncertain. In addition, convening a task force or study commission is a good way to keep the issue alive when competing policy priorities or budget difficulties make immediate action unlikely. Experience demonstrates, however, that although a task force or commission can buy you time, even a favorable report to the legislature is no guarantee that a matched 529 policy proposal will receive favorable treatment.
6. Keep asset limits in mind. One of the most effective strategies in helping people build wealth is to remove disincentives to save. For low-income families, some of the most powerful disincentives are asset tests that limit the amount of liquid assets for recipients of public assistance, such as the Supplemental Nutrition Assistance Program, Temporary Assistance for Needy Families and Medicaid. In working toward legislation to establish incentives for 529 savings, advocates must be sure to add language to exempt these accounts from asset tests.
For each edition of the Assets & Opportunity Scorecard since 2007, CFED has worked with experts in the field to capture detailed stories of noteworthy state policy changes—both policy victories and instructive defeats. These case studies appear in the Resource Guides for each policy priority.
From Pilot toward Universal Coverage in Arkansas (updated October 2011)
For the past several years, Arkansas advocates and policymakers have been incrementally advancing toward universal incentives for college savings. When advocates began pushing for the creation of a matching grant in the mid 2000s, they faced a number of significant hurdles: initial skepticism among policymakers that such a program would work; no funding source to implement a universal program; and a lack of research on the impact of universal programs. Thus, rather than immediately push for a universal program, advocates instead pursued a pilot program to test the demand and efficacy of a matched 529 account. Click here to read more.
New Matching Incentives and a Successful Prepaid Tuition Program in Nevada (published October 2011)
In the early months of 2009, the Nevada State Treasurer’s Office began exploring new ideas to increase participation in the state’s 529 college savings programs among low- and moderate-income families…As part of a broader contract renegotiation with 529 program manager Upromise Investments, the Treasurer and the Board of Trustees of the College Savings Plans of Nevada developed the outlines for the Silver State Matching Grant Program. Click here to read more.
Demonstrating a State Program at Scale in Oklahoma (published September 2009)
SEED OK is a longitudinal experiment with random assignment of treatment and control participants that uses a 529 college savings plan to test the concept of giving every child an account at birth. In a competitive process, the Center for Social Development selected Oklahoma as the state to implement this innovative project. CSD is collaborating with multiple agencies within the state of Oklahoma: the Treasurer’s Office; the Departments of Health, Human Services and the Tax Commission; and the Oklahoma College Savings Plan. Click here to read more.
Creating Incentives for College Savings in Maine and Texas (published September 2007)
Maine began its matching program in 2002. At that time, Maine residents with incomes at or below $54,500, who opened a NextGen Account with a minimum deposit of $50, could receive a one-time $200 initial deposit from the state… Texas’ prepaid tuition plan, the Texas Guaranteed Tuition Plan, also known as the Texas Tomorrow Fund, was established in 1996. Click here to read more.
For a two-page overview of college savings incentives, download CFED’s Policy Brief.
For an in-depth compendium of analysis, research, and resources on college savings incentives, download CFED’s Resource Guide.