How to expand middle-class college savings

In the face of popular backlash, President Obama recently shelved a controversial plan to end the tax-free college savings accounts known as 529s.

Despite its initial defense of the proposal — on the grounds that roughly 70 percent of the program’s benefits go to households earning $200,000-plus — the White House dropped the idea after immediate and intense criticism from both Republicans and Democrats, who argued for its popularity with the middle class.

Republicans now plan to capitalize on this misstep with a plan to expand 529s. According to The Wall Street Journal, a bipartisan proposal sponsored by Reps. Lynn Jenkins (R-Kan.) and Ron Kind (D-Wis.) may get a vote as early as next month.

While the White House could revert to its original stance and oppose the Republican plan, here’s a better idea: embrace the idea of expanding access to college savings and take it one step further.

{mosads}Not only should the administration endorse the Jenkins-Kind bill, it should offer its own ideas to ensure that more middle-class families can save for college, including through 529s. Moreover, it can do so by building on a variety of promising practices already underway to help middle-class Americans save for their children’s education.

While the president’s proposal for free community college is both promising and bold, the majority of American families still aspire to four-year college, which is why a “race to the top” for college savings would have broad middle-class appeal.

One Department of Education study, for example, found that 45 percent of 9th graders expect to enroll in a bachelor’s degree program, while just 17 percent expected to get an associate’s degree and only 3 percent had no expectation of higher education at all.

Moreover, in keeping with those college-going aspirations, the majority of Americans consider saving for college to be a top-tier financial priority.

A 2014 survey commissioned by Sallie Mae, for instance, found that 51 percent of families are saving for college, and that the total average savings for education was $15,346 (up from $11,781 in 2013).

Sallie Mae also found that households typically use at least two kinds of college savings vehicles, including regular savings accounts and 529s. According to the College Savings Foundation, more than 70 percent of 529 accountholders have yearly household incomes under $150,000, including 10 percent with incomes below $50,000.

While programs such as 529s aren’t inherently structured to shut out lower and middle-income savers, and participation is growing, the lack of means, information and access still hinders middle- and lower-income families. The 529 program skews toward wealthier households not just because they have more money, but better access to financial planning services and tools.

In addition to the Jenkins-Kind bill — which would improve 529s by allowing computer purchases with account funds, eliminating paperwork and allowing tuition refunds to be re-deposited without penalty — a host of new and existing ideas could help make 529s a stronger and more easily accessible vehicle for middle class college savings:

• Simplifying investment options.

Because 529s are private investment accounts similar to 401(k)s, investment choices can be both overwhelming and fraught with risk. One idea to simplify these decisions comes from a 2009 Treasury Department report commissioned by the White House’s Task Force on Middle Class Working Families, a first-term Obama initiative. Among the report’s recommendations: increase the availability of “age-based index funds,” similar to target-date retirement funds. Not only do these funds have the lowest fees, they eliminate the need for families to actively manage their investments.

• Encouraging employer contributions.

Some employers, such as Dun & Bradstreet Credibility Corp., have begun offering matching contributions into 529 accounts as a worker benefit. Dun & Bradstreet Credibility Corp.’s “EdAhead” initiative, for example, matches employee savings dollar for dollar up to $2,500.

Under current law, however, employer contributions to 529 accounts don’t count as employer-sponsored “educational assistance benefits.” This means they aren’t deductible to the employer and are taxable to the employee. While companies such as Dun & Bradstreet Credibility Corp. circumvent this problem with additional contributions to cover the taxes, the current rules no doubt discourage broader participation by employers.

One simple change would be to modify the tax code’s definition of employer-sponsored benefits to include 529 matching contributions.

• Encouraging savings by middle-and lower-income households.

Pioneering work by Ray Boshara of the St. Louis Federal Reserve and the New America Foundation has led to numerous innovations by states and nonprofits to increase access to 529 accounts and match the contributions made by low-income savers. The state of Maine, for example, automatically establishes a 529 account for every child born in the state and seeds it with a privately funded $500 grant.

And in an earlier 529 enhancement proposal introduced last Congress, Jenkins and Kind offered another idea to help moderate-income Americans save: allow 529 contributions to count toward the Saver’s Credit, which currently only covers retirement.

Increasing college access and affordability are rightly at the heart of any “middle-class economics” agenda, and the president deserves kudos for beginning this debate.

But let’s not forget: encouraging savings is just as important a pillar of expanding middle-class opportunity.

This piece has been corrected to use the full name of Dun & Bradstreet Credibility Corp. in all occurrences, as it is a separate company from Dun & Bradstreet, Inc.

Kim is editor of Republic 3.0, the centrist politics and policy site, and a senior fellow at the Progressive Policy Institute.