College savings plan–time to get serious

We’ve recently joined with CFED, a national organization dedicated to expanding economic opportunity, and the Oklahoma Asset Building Coalition, in releasing the 2009-2010 Assets and Opportunity Scorecard. Our earlier post summarized the Oklahoma results, as did several media reports.

One area where Oklahoma needs to do better is our 529 college savings plan. Section 529 of the federal tax code allows families to set aside savings in a special account overseen by the state government. Interest earnings on the account are not subject to the federal or state income tax. CFED points out that:

Post-secondary education is one of the best investments an individual can make in his or her economic future…Yet escalating costs discourage many from pursuing post-secondary education. For many low-income families, the net out-of-pocket cost of a four-year public university education (even after grant aid) is estimated to be as high as 39% of total income.

Scholarships, grants and loans rarely cover the full cost of attending college; even students that qualify for federal and state aid need family income to pay the many expenses not covered by student aid. In addition to helping with college expenses, the practice of saving for college for your child or yourself can alter expectations about college attendance and help develop habits and skills that can provide far-reaching benefits.

CFED suggests making 529s more widely available and meaningful across the income scale by opening accounts for all children at birth; providing incentives for families to save by matching their contributions; and minimizing barriers to savings such as minimum contribution requirements. CFED gives Oklahoma low marks; we are one of 39 states with “No policy in place” for college savings incentives. This confirms what we already knew: Oklahoma must work harder to make post-secondary education  a realistic goal for all our students and to increase enrollment and educational attainment so we can compete more effectively in a rapidly-changing world economy.

Where to start? We asked Soddee Knight, our intern from Oklahoma State University, to compile a comparison of all the 529 plans in the nation. Here’s what we learned about how Oklahoma’s plan compares:

• Oklahoma’s minimum contribution to start an account, $100, is higher than 63 of the 101 savings plans (many states have more than one plan). This is a significant financial barrier that closes off 529s as a viable option for many low- and middle-income families. We should work toward a zero or very low initial deposit. Eventually, we should open account for all children with no initial deposit required.
• Additional contribution requirements are also high in Oklahoma. Our $25 contribution is higher than 37 other plans, many of which have no minimum at all. CFED says any minimum “…can be a barrier for very low-income families who may only have a few dollars at a time to deposit.”
• Oklahoma’s is one of 61 plans where families can deduct contributions to their 529 plan from their state income taxes. Our deduction–up to $20,000 for a family–is among the most generous. A deduction, however, is of little or no value to a low-income taxpayer. The most recent available data showed that fewer than 700 families earning under $50,000 took advantage of this benefit in Oklahoma in 2005. We could convert this deduction into a refundable tax credit, so that each dollar invested in education saves a dollar in taxes up to a maximum amount, even for those not owing state income taxes. Three states currently offer a credit for contributions..
• Unlike many states, Oklahoma considers the balance of 529 accounts in calculating state financial aid, so our students could receive less aid because their families saved money for college. That’s the wrong incentive; we want to encourage savings as part of the way to make college affordable. We should make savings, grants, and loans work effectively together.

We will be proposing a specific legislative agenda to make Oklahoma’s current 529 plan a more effective tool in building opportunity for all Oklahoma families, encouraging saving, and expanding our educational attainment and economy. We hope you’ll join us in our efforts.