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College Savings Incentives

Overview

Postsecondary education is one of the best investments an individual can make in his or her economic future. One way to make post-secondary education more affordable and increase participation by lower-income individuals is to create incentives for them to save for college in tax-free 529 college savings accounts. Incentives can take many different forms, including: automatically enrolling all children in 529 accounts; seeding accounts with an initial deposit; providing direct dollar-for-dollar matches or state income tax credits for continued contributions; and offering no-fee and no-minimum deposit investment options for low-income savers.

Policy Ratings

To see state-by-state policy data, click here.

Elements of a Strong Policy

Based on research by CFED, the Center for Social Development, the New America Foundation and others, CFED considers a state’s college savings incentive policy strong if it meets the following criteria:

1. Are accounts automatically opened for all children at birth? States should automatically enroll all newborns into their 529 plans.
2. Does the state incent saving for college for low- to moderate-income residents or all residents? States should provide a match or tax credit on college savings for as many children as possible, but at least for children in families with low and moderate incomes.
3. Is there potential for meaningful account balances after 18 years? States should design incentives so they result in meaningful savings (or number of prepaid units) by the time most young adults are ready for post-secondary education. Although college costs continue to increase rapidly, savings accumulations of $8,765 would pay for at least two years worth of tuition and fees at a public two-year college 18 years in the future.¹ Therefore, for the purposes of this policy measure, an account balance of at least $8,765 at age 18 is considered “meaningful.”
   
   The potential for a meaningful account balance (or number of prepaid units) after 18 years is influenced by whether a state makes an initial deposit (or prepaid credit purchase) to seed the account, the amount of that deposit/credit purchase and the structure of state matches or tax credits for individuals’ deposits/credit purchases. The presence of a state match or tax credit and its rate and duration will greatly impact the final balance for an account.
4. Does the state minimize barriers to saving? Recent research on 529 savings behavior among low-income families has revealed that small changes to program structure can greatly increase savings and participation rates. States should ensure that saving is as easy as possible, and that accountholders’ investments are not whittled away by high fees and service charges. To do so, states should ensure that:
   • Small deposits are permitted. Many 529 college savings plans have a minimum deposit requirement (often $15 to $25), which can be a barrier for very low-income families who may only have a few dollars at a time to deposit. States should allow deposits of any size to 529 accounts, no matter how small. Similarly, states should not mandate minimum credit purchases for prepaid plans.
   • The college savings plan offers a no-cost investment option. States should minimize fees and service charges in their 529 plans, and should offer a basic investment option with no fees for enrollment, account maintenance, program management or other investment costs.

Footnotes

1. Threshold figure of $8,765 determined by projecting forward current cost of two-year public college tuition and fees ($5,426) by 2.7% per year (based on average annual increase in tuition prices over the last decade). Data derived from Sandy Baum and Jennifer Ma, “College Board’s 2010 Trends in College Pricing Report,” http://trends.collegeboard.org/college_pricing.