The Basics of Progressive 529s

In 2001, the Internal Revenue Code authorized college savings plans (529 plans) as a tax-advantaged savings tool. In a 529 plan, individuals save money in an account that is dedicated for future college expenses of a beneficiary. States administer 529 plans, and offer a limited selection of funds with a range of risk and return characteristics. In addition, contributions are tax deductible in many states for state-resident contributions to 529 plans. The account owner chooses a beneficiary, who can be changed at the owner's discretion.

The account may be used at any eligible educational institution, including public and private colleges and universities, graduate and post-graduate schools, community colleges, and certain proprietary and vocational schools.

Although there is growth in awareness and participation, people saving in 529 plans have higher incomes and assets than those not saving in these plans. In addition, 529 plans are regressive in their current form. Tax incentives provide more benefit to people with higher incomes. Individuals with lower incomes have little or no tax liability and may have little wealth to transfer into 529s to take advantage of tax-free earnings. By 2003, an estimated 8% of United States households had opened one or more 529 savings plan accounts. Among households that did not own a 529 savings plan, 61% were aware of 529s. Among households with annual income under $50,000 and without a 529 savings plan, almost half were aware of 529s.

Although current participation in 529 plans is primarily among mid-to-high-income families, the 529 savings platform lends itself to a more inclusive saving policy. It is the characteristics of 529s -- especially public oversight, centralized accounting, low deposit minimums, and matching provisions -- that can become building blocks for more inclusive policy.