Three Ways to Improve College Savings Accounts
As any new parent knows, accomplishing small things can be hard. High off of the victory of showering one day when my son was around five weeks old, I was eager to cross our apartment's threshold and be in the world, so I decided that we would pick up my husband from work. About a mile into our four mile trek, I committed the hubris of believing that the lack of commotion from the back of the car meant that the little guy had consented to our outing. But then it started. The blood curdling cries that only newborns and birds are capable of. And it continued until we arrived at my husband's office: my son, screeching and turning a royal purple (once home, I would google to find out if protracted shrill crying could cause an aneurysm) and me, hunched over the wheel with my neck retracted into my shoulders. Upon entering the car, my husband began offering comforting words in a soothing tone. I'm not sure which one of us they were intended for.
In the face of such routine tasks (showering, leaving the home, taking a short drive) requiring a herculean effort, it's no wonder that tasks on the periphery, even important ones, are neglected. And so goes the story of how my son was fourteen months old before I opened his college savings account, or 529. This should be a shameful admission: I work on savings policy for a living. But, my experience isn't exceptional for the amount of time it took to happen. It's exceptional because it happened at all. We now join less than 3 percent of other families as 529 owners.
The problem isn't just that so few families are saving in 529s; it's that those few likely would be able to sent their kids to college without the support of the program. According to the GAO, the median financial assets of families with 529s are $413,500. So, as currently designed, 529s are primarily vehicles for helping the wealthy build wealth with the support of significant public expenditures. With some tweaks, 529s could be a platform that supports the college ambitions of all children. Here's how:
1. Make them universal. Most parents don't work on savings policy at a think tank. From my vantage point in the Asset Building Program of the New America Foundation, I am well oriented to the merits of saving and ways to do so, especially for college. But most parents aren't. In fact, only more than a third of parents have even heard of a 529. Can you save for college outside of a 529? Sure. And, most do. But these accounts are structured with distinct advantages, like preferential treatment under financial aid, public benefits, and tax systems. But you can't save in an account that you don't know exists.
2. Make them automatic. In the world of savings, benefits compound. Interest builds balances and interaction with accounts builds expectations for the future, so starting early matters. But, for most people, including overwhelmed parents, the savings equations looks something like: in the future + requires effort = not gonna' happen. By making account opening automatic, either at the time of birth or upon entering school, the pathway to savings opens up.
3. Make them progressive. It's not a coincidence that I opened my son's 529 in December. It was latest possible month a procrastinator can make financial decisions that are counted in the current tax year. Being able to capture that deduction lit a fire. Tax benefits, however, are inherently regressive and offer little to no incentive for lower-income families to participate. A seed deposit with a match would make saving a valuable prospect for families left out of the current structure.
Many of these strategies are already in place in cities and states across the country, potentially helping college be more accessible and affordable. Parenting isn't going to get easier, but saving can.
Rachel Black is a senior policy analyst in the Asset Building Program at the New America Foundation. This piece originally appeared on the Asset Building Program's blog, The Ladder.