There are 13 million college savings accounts in this country, and more than half received at least one deposit in 2016. Those are decent numbers, and growing—but they cover just a tiny fraction of the country’s college-bound population.
A current bill in the House of Representatives aims to change that. Supporters of H.R. 529 say it could address both a lack of awareness of the plans—by encouraging employers to add 529 plans to their benefits package—as well as inflexible spending rules, by offering more ways to use 529 funds without getting hit with a penalty.
The bill, co-sponsored by Rep. Lynn Jenkins (R-Kan.) and Rep. Ron Kind (D-Wis.), would let companies contribute up to a $100 match to employee 529 plans without counting it as taxable compensation, and would offer a tax credit to small businesses to help offset the costs of setting up a payroll deduction system. (The bill also provides for similar payroll matches for ABLE account contributions.)
Savers also would be able to use money from a 529 account, penalty-free, for paying off student loans or making charitable contributions. Currently, 529 account holders must pay a 10% penalty on earnings if they use the money for anything but approved college costs.
Although 529 plans have been around for 20 years, growth has been relatively slow for a variety of reasons. One key challenge: Surveys regularly find that many parents have never heard of 529 plans or don’t understand how they work.
Leaders of the College Savings Plans Network, a coalition of state-run college savings programs, hope that 529 plans can follow the path of 401(k) accounts to become a widely offered employee benefit. “When companies got into payroll deductions and matching contributions, there was a huge growth in people participating,” says Young Boozer, the Alabama state treasurer and chairman of the College Savings Plans Network.
Some employers have already started to offer 529 plans to workers.
Ascensus College Savings, which administers 31 529 plans in 17 states, works with nearly 14,000 companies that include 529 plans in their benefits package. That number has grown significantly in the past couple years, says George Makras, director of institutional relationship management at Ascensus.
Makras says a bill like the one Jenkins and Kind have introduced would make it more convenient for employees to regularly contribute to college savings. Plus, a small amount of free money from an employer match could be the nudge parents need.
“For someone who’s on the fence, it might swing the pendulum a little bit,” Makras says.
This isn’t the only new bill that encourages employers to contribute to contribute to college savings. Another one introduced earlier this week would allow for tax-free employer contributions of up to $5,250 to either student debt payments or 529 plans. The bill, co-sponsored by Rep. Patrick Meehan (R-Pa.) and Rep Suzan DelBene (D-Wash.), would also provide a tax credit to employers.
Last year, the American Council on Education (ACE), which lobbies on behalf of higher education organizations, endorsed a similar bill aimed at enhancing 529 plans. That bill, introduced by Sen. Richard Burr (R-N.C.), proposed penalty-free rollovers from 529 accounts into Roth IRAs and a tax-free employer match up to $1,000.
ACE hasn't endorsed this year's House bills, but the organization does support making it easier for families to save for college, says Steven Bloom, ACE's director of government relations.
One of the things that made the earlier bill especially attractive to the higher education organization was a component that would make 529 plans more useful to lower-income families by offering them a tax credit for putting money away. (Higher education economists have criticized 529 plans as a tool used predominantly by the upper half of the income spectrum, because the benefit of earnings being tax-free increases as your income increases.) There's no such provision in either of current House bills.
Indeed, one potential problem with the current proposals is that, by offering the money as a savings match, employers would effectively be increasing compensation for people who already have enough disposable income to save extra money. That's not a subsidy that helps those people who need the most help, says Sandy Baum, a senior fellow at the Urban Institute who's an economist and expert on higher education finances.
"Middle-income families should be saving more for college, and we should do what we can to help them," she says. "But we should be careful about the extent to which we use taxpayer dollars to help with those subsidies."
Last year's Senate bill didn't advance beyond committee. Neither have previous versions of Jenkins' current House bill. But that doesn't discourage Boozer. A couple years ago, Congress passed a 529 expansion that allowed money in a 529 to be used on students' computers—albeit only after a couple years of promoting the idea.
The process is always incremental and gradual, Boozer says.