This year is shaping up to be another terrible one for college affordability. Tuition has never been higher. The Supreme Court will probably kill President Biden’s student loan forgiveness plan. Loan payments, which have been frozen for nearly three years, will resume shortly thereafter. The new Republican House majority has vowed to sharply curtail domestic spending, which would involve making funds for new scholarships scarce and probably curbing other programs that help families pay for higher education.
Given all this, Congress would be wise to repurpose existing college subsidies that benefit people who don’t need them. In particular, Congress should impose sensible limits on contributions to 529 college savings plans. Many of those accounts have become yet another tool for affluent people to accumulate untaxed investment gains. They should be focused on the middle-class families that need them.
In 1996, a bipartisan group of U.S. senators including Bob Graham and Mitch McConnell led efforts to pass 529 accounts into federal law. Their intentions were largely good: to give families a tax-preferred vehicle to save for their children’s higher education. But studies show that 529 benefits overwhelmingly accrue to the rich. A 2012 report from the Government Accountability Office (GAO) found that less than 3 percent of families had 529s or similar plans, and those families had 25 times more financial assets than typical families without plans. The cost to the U.S. Treasury? Around $3 billion annually.
The GAO also found that the median family with a 529-type plan had an annual 2010 income of about $142,400, roughly $195,000 in today’s dollars. While that figure raised eyebrows—it’s more than three times the median income of families without plans—it probably rings more like “comfortably upper-middle-class” than “rolling in it,” particularly given today’s high price of college.
That $195,000 figure actually understates how much 529s favor the rich. It doesn’t account for the fact that the wealthiest families sock away so much more money than do other account holders. We recently examined 2019 public data from the federal Survey of Consumer Finances. These data include information about families with federal tax-preferred savings accounts. To protect confidentiality, college savings account data are pooled with health savings accounts, but the vast majority of the assets in those accounts were in 529s and related college savings accounts. We found that about half of all the money held in such accounts was reported by households with inflation-adjusted annual incomes exceeding $437,000.
Giving people an incentive to save for college is a good idea. But the history of 529s shows how savings programs inevitably bend toward the most affluent and politically influential constituencies. A few years after creating the program, Congress changed the law to make 529 earnings tax-free, which particularly benefits the wealthiest families. Then the plans were opened to pay for private K-12 tuition. Then, in 2021, Congress made it easier for wealthy grandparents to pass 529 money down through generations. You see where this is going.
Subsidizing a small class of wealthy college savings plan owners deepens already troubling incentives for colleges to cater to the whims and tastes of the elite by building elaborate exercise centers and hotel-style dormitories, driving up costs across the entire higher education sector. Head to the parking lot on parents’ visiting day at any elite university. You’ll find many more $60,000 Teslas and BMWs than you’ll find Hyundai Sonatas.
Studies find no evidence that federal college tax credits, including 529s, have much effect on whether people go to college, what kind of college they attend, or how much they pay. The reason is simple: These programs overwhelmingly smooth the path for people who could already afford college and were already very likely to enroll.
Congress shouldn’t eliminate 529s. Instead, it should focus 529 subsidies on middle-class families, who have the greatest need. One simple approach would be to bar contributions once someone’s 529 account balance reaches $100,000. According to the College Board, in-state tuition, room, and board at a typical public university run about $23,000. A $100,000 cap would allow real middle-class families to save the full cost of four years of public higher education. This rule would have zero impact on the vast majority of students and families. Less than 15 percent of college savings account holders have balances above this threshold.
In a time of fiscal belt-tightening, with no permanent solutions to the college cost crisis in sight, a 529 cap provides a simple, sensible, and fair way to save taxpayer dollars while helping the students and families who need help the most. Fiscal conservatives sometimes criticize tax-advantaged savings incentive programs as middle-class entitlements. That’s exactly what 529 accounts should be—a valuable tool and spur for savings for middle-class families. These accounts should not be yet another set of lucrative tax shelters for the most affluent among us. They don’t need the help.