Guest Post: GAO Shows How 529 Plans are Subsidizing the Wealthy

By Chad Aldeman

If President Obama and House Speaker John Boehner need to find additional savings from the federal budget, a new Government Accountability Office report suggests one place they could look to find a couple billion dollars a year: the tax expenditure program known as 529 plans. In a damning report, the GAO found that the federal government spends $1.6 billion every year subsidizing college savings plans for wealthy families. To give some perspective, that money could pay for an additional 288,000 Pell Grants for low-income students.

The report chronicles the rise of 529 plans (and a similar savings vehicle called Coverdell Education Savings Accounts) from their start in 1986 as a small state program in Michigan. By 2001, these programs had become so popular that Congress made distributions for qualified higher education expenses tax-exempt. Today, every state offers accounts and a suite of contribution incentives and tax benefits. There are now 10 million accounts with $167 billion in assets (individuals can have more than one account). GAO researchers document a number of problems with 529 plans—including the fact that some plans are charging annual fees nearing 3 percent—but the most interesting finding is just how few American families are benefitting from these plans, and just how wealthy those who do are.

Using 2010 data from the Survey of Consumer Finances, the GAO found that less than 3 percent of American families had a 529 plan or Coverdell account. Even among families with children under age 25, the percentage rose only to 6 percent.

The families that are using these accounts as savings vehicles are disproportionately wealthy. The GAO found the following disparities:

The chart shows that families with 529 plans had nearly three times the annual income, twenty-five times the financial assets, and four times the retirement assets than families without 529 plans or Coverdell accounts. It’s important to note that these are median figures, meaning the typical beneficiary of a 529 account is very different than most American students. It also means there are many students and families who are benefitting from 529 savings accounts who are even better off.

As I wrote in a 2011 piece for Education Sector, “while helping families afford higher education is a worthy public policy goal, federal and state tax codes may not be the best way to accomplish it.” The federal government foregoes billions of dollars in revenue each year to subsidize wealthy families to save for college, and “that money would be better used to boost programs that directly help students afford college who would otherwise not be able to.”

Chad Aldeman is a senior policy analyst at Bellwether Education Partners, a nonprofit organization working to improve educational outcomes for low-income students. Previously, Aldeman was a policy advisor in the Office of Planning, Evaluation, and Policy Development at the U.S. Department of Education, where he worked on teacher policy and secondary schools. Prior to joining the Department, Aldeman was a policy analyst with Education Sector, where he focused on K–12 and higher education accountability.