The Treasury Department released its much-anticipated report on Section 529 Savings Plans today. As I’ve written previously, 529 plans have been a tremendous public policy disaster over the last year, resulting in tens of thousands of families losing large chunks of their college savings funds just as their kids were headed to college. The report puts a number on that loss: $25-billion, which is more than the total amount of money the government spends on Pell grants every year. And that likely understates the investment loss, since it represents the total change in asset values from Q4 2007 to Q4 2008 and presumably net contributions to 529 plans exceeded withdrawls.
The report has little to say about this, other than recommending that families strongly consider “age-based” plans that shift assets from equitites to conservative fixed-income securities as students approach college age. But the report also notes that that such funds are already the most popular choice, and yet parents lost $25-billion. Why? Because in states like Oregon, the private fund managers interpreted “conservative fixed-income securities” to mean “mortgage-backed security derivatives,” or, as the Oregon Attorney General put it in the huge lawsuit, “a hedge-fund like investment that took extreme risks.”
The report also provides some additional data to support what’s been pretty obvious all along: 529 plans primarily benefit rich people. Comprehensive data is hard to find because plans are adminstered by individual states, but Treasury found three relevant sets of information.
First, data from the 2007 Survey of Consumer Finance found that among households in the top five percent of income — average income, $548,000 per year — those with education savings plans held an average balance of $106,250. That’s more than triple the average for households in the 90th-95th percentile, more than ten times the balance for the 50th-75th percentile, etc.
Second, among households in Kansas who took a state income tax deduction for 529 contributions, the average deduction for households making over $250,000 per year was $10,323. For those in the $100K-$250K range it was less than $5,000, for everyone else, less than $3,000.
Third, the report found that households in Louisiana with incomes over $200,000 per year held 42 percent of all 529 balances. Those in the $100K-$200K range held another 30 percent. And that’s in Louisiana, which doesn’t have a whole lot of rich people. What would that table look like in Connecticut or New York?
So clearly the taxpayers are shelling out a lot of money subsidizing the college tuition of students and parents who are manifestly not in need of any subsidy. Yet Treasury declined to speculate that this might be a bad idea. Instead, the report said this:
While Section 529 plans offer tax benefits to any family with sufficient income to pay federal income tax, they are of greater benefit to high income families whose tax rates tend to be higher. This tax advantage is likely part of the reason why Section 529 account balances tend to increase disproportionately with increases in income. Whether this is undesirable is debatable. It could be argued, for example, that the most effective way to help low income families with college expenses is through direct student aid, and that Section 529 plans are therefore naturally targeted to higher income families.
In other words, the United States Department of the Treasury believes that there is no way to definitively determine whether a tax break that disproportionately benefits rich people is “desirable,” because the tax break in question was designed to disproportionately benefit rich people. The banks and investment houses that made millions of dollars in fees administering 529 plans before losing billions of dollars in college savings will undoubtedly be pleased with this iron-clad logic.
