State-sponsored college savings plans, often called 529 plans, offer tax incentives to facilitate saving for postsecondary education. Low- and moderate-income families are less likely to have college savings than higher-income families.
To address this inequity, a number of states have launched 529 savings match incentive programs. Most savings match programs offer the greatest financial rewards to families with the lowest incomes.
Savings is important for financial reasons, but also may have implications beyond the money, find researchers from the Center for Social Development (CSD). Among youth who expect to graduate from a four-year college, those with a savings account in their name are approximately six times more likely to attend college than those with no account.
A recently released CSD report examines the program design of all state 529 savings match programs and offers recommendations aimed to facilitate access, increase program participation and perhaps reduce administrative costs.
- Require a low minimum deposit. State direct-sold plans usually require a minimum initial deposit of $25 to open a 529 account. The steeper minimum deposits in some 529 savings match programs — as high as $250 in Nevada and Rhode Island — might be burdensome for some families and, thus impede the goal of reaching more low- and moderate- income state resident families.
- Omit the separate savings match application. Most states require a 529 plan account owner to complete a match application, which must be submitted annually. A couple of states use information on the one-time 529 plan enrollment form to eliminate the need for families to complete a separate annual savings match application.
- Automate match eligibility by sharing tax records. Many states also require account owners to mail copies of tax returns (state, federal or both) with their savings match application each year to prove income eligibility. Similar to Louisiana, other states could eliminate this paperwork and determine families’ match eligibility by using electronic tax records from the Department of Revenue.
- Make initial deposit programs for newborn children automatic. A few states offer initial deposits if parents enroll newborns in the state’s 529 plan. Automatic enrollment is a tool for overcoming inertia by opening accounts for eligible individuals while still allowing participants to opt out. Programs that do not automatically enroll all eligible children run the risk of disproportionately benefitting financially savvy families.
- Collect additional data. It would be useful for states to collect and report on who saves and benefits from a state 529 plan in general, and the saving match program specifically. More research is needed to determine whether savings match programs boost college savings for low- and moderate-income families.