Five Low-Cost Federal Policy Ideas to Help Families Save for College

David Newville, Margaret Clancy, Rourke O'Brien
At a time when low-income students are underrepresented in higher education and the cost of attendance is becoming increasingly unaffordable, 529s have the potential to address issues of college readiness, access and completion. College savings can help make higher education more affordable, and have the potential to change aspirations and behaviors of both students and their parents. Research from the asset building field has shown that even a relatively small amount of savings can have positive impacts on behavior and achievement.

Although there has been growth in awareness and participation in 529s since they were created by states in the 1980s and given federal tax-advantaged status in 2001, most families currently saving in 529s tend to be middle or high income. The accounts are currently structured so they provide benefits to people with higher incomes in the form of tax incentives. Lower income families receive little or no tax benefits from contributing to 529s, which reduces their incentive to participate.

Improvements to the 529 platform could increase the number of low and moderate income families saving in 529s and make it easier for these families to build assets for education. These reforms include large initiatives, such as coordinating existing higher education tax credits and financial aid with 529s, as well as small initiatives to increase savings. Below are several low-cost, simple reforms for 529s at the federal level. These would be important first steps for enabling more low- and moderate-income students to complete higher education.