On June 2, the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises held a hearing on 529 state tuition savings plans, flexible tax-free savings accounts for college tuition.
Explaining that investors have predicted that total assets in 529 plans will “balloon” from $35 billion in 2003 to $300 billion by 2010, full committee Chair Michael Oxley (R-OH) stated, “The success of 529 tuition savings plans is good news, but it is not surprising. These programs offer all families, regardless of income, the opportunity to obtain tax-free growth and distribution on the money they save and invest for college costs.”
Pointing to the increasing cost of tuition, Diana Cantor of the College Savings Plans Network said that most families have little savings and increasingly rely on student loans to pay for college: “The 2002 National Student Loan Survey indicates that since 1997, the growth in average debt for undergraduates attending public institutions is 57 percent, for an average debt amount of $18,900 for graduating students. Even more troublesome is the reliance on credit card debt to finance higher education costs, with an average credit card debt of $3,400 among graduates who report using this means of financing college costs.” Ms. Cantor explained that the tax advantages in 529 tuition savings plans have increased their popularity, noting that every state has at least one option for its residents. In response to concerns that the 529 plans vary greatly from state to state, she argued that “the unique features of our plans provide their prime attraction the ability of each state to craft a program that best suits its citizens’ needs and furthers that state’s higher education policy.” Ms. Cantor said that the network “has undertaken an effort to create voluntary disclosure principles” among all 529 plans and would make improvements to its website so consumers can access information about all of the plans in one location. “The goal is to provide a clearinghouse where a consumer can compare fees, investment options and basic offering materials in a convenient, accessible, independent format that is not associated with any one state or plan,” she stated.
Testifying on behalf of the Securities Industry Association (SIA), Marc Lackritz explained that Congress authorized the tax-free treatment of distributions used for educational purposes as part of the 2001 Economic Growth and Tax Relief Reconciliation Act (P.L. 107-16), increasing the popularity of 529 plans. “More than $40 billion is now invested in 529 programs, nearly 13 times more than the approximately $3.1 billion invested in 2000…The average 529-account balance is now about $8,200, and between 7-8 percent of families with children under 18 own a 529 savings plan,” he stated, adding, “Indeed, if a family contributed $2,000 annually to a 529 account for 18 years (assuming an 8 percent rate of return) the family would have saved nearly $75,000 for college an amount that would meet the requirements of most four-year public institutions across the country.” In order to improve the 529 plans, Mr. Lackritz encouraged Congress to extend the 2001 tax benefit, which is scheduled to expire on December 31, 2010; create tax parity among all 50 states; and require 529 plans to disclose fee and investment information. Explaining that families lack the investment knowledge to understand the differences among the various 529 plans, Mr. Lackritz said that the SIA has strengthened its investor education program. “We recently updated our Guide to Understanding 529 Plans to include a list of questions a 529 investor should consider before investing in a particular plan. The brochure is available free of charge to the public. In addition, our highly rated investor education website, www.pathtoinvesting.org, includes information on 529 plans, as well as opportunities to invest a hypothetical account.”
Michael Olivas, director of the Institute for Higher Education Law and Governance at the University of Houston Law Center, said that the persons least likely to participate in the 529 plans “are the less-well educated, the poor, immigrants and minorities,” adding, “System complexity in state prepaid and savings programs even in states with low barriers to entry and monthly payment options attract and reward the most advantaged and knowledgeable participants, much like the college application process itself, which so clearly serves the interests of advantaged and wealthier students. If information and investor savvy are needed for these dynamic investments, state prepaid and savings [plans] will widen the gap between wealthy and poor, majority and minority, street-smart and average persons.” Mr. Olivas urged Congress “to facilitate truly comparable disclosure requirements, full and open participation data, usable program investment performance, and comprehensive eligibility and enrollment information.”
