Low-Cost State Innovations to Help Families Save for College

Mark Huelsman and Margaret Clancy
At a time when low-income students are underrepresented in higher education and the cost of attendance is becoming increasingly unaffordable, 529 college savings plans have the potential to address issues of college readiness, access and completion. Savings can help reduce higher education debt, making college more affordable, and has the potential to change aspirations and behaviors of both students and their parents. Research from the asset building field shows that even a relatively small amount of savings may have positive impacts on behavior and educational achievement.

Awareness and participation in college savings plans have grown significantly since they were created by states in the 1980s, inserted into the Federal tax code as Section 529 in 1996, and given federal tax-advantaged status in 2001. But because lower income families receive little or no tax benefits from saving in 529 plans, 529 participants tend to be middle or high income. Removing potential barriers and creating new incentives for participation could increase the number of low- and moderate- income families that save in 529s and make it easier to build assets for higher education.

While 529 plans are defined in the federal tax code, individual states have considerable latitude to innovate and make their plans more inclusive. Some states have undertaken large-scale initiatives, such as matching contributions or establishing accounts at birth. Other states have been exploring a number of smaller, lower-cost innovations to remove disincentives and increase savings, as detailed below. States are often the testing ground for future federal policies, and several of these initiatives could also be enacted at the federal level.