Bringing College Savings Within Reach?
Saving is hard. We know that all too well. It's one of the reasons that only about 3 percent of American families use tax-advantaged savings accounts (529s and Coverdells) to save for college. Saving is even harder when you're told you have to choose between putting food on the table and putting some money away for your child's college education.
Asset limits in public assistance programs force families to make these choices all the time, promoting financial insecurity that can haunt a family long after they've stopped receiving assistance and preventing prudent behavior like saving for college. We've long argued that asset limits are desperately in need of reform and that public benefits should be simple to administer, and should promote savings and self-sufficiency.
Recognizing this need, Representative Matt Cartwright (D-PA) has announced his plan to introduce a bill to exempt 529s and other Child Savings Accounts (CSAs) from consideration in most public assistance programs. Writing with Melinda Lewis from the Assets and Education Initiative in The Hill, Rep. Cartwright says,
Unfortunately, current policy often serves as a disincentive to savings. Today, savings balances often count against the asset limits in public benefits such as the Supplemental Nutritional Assistance Program (SNAP), commonly known as food stamps. These asset limits force families to choose between saving money for college and putting food on the table. For this reason, I [Rep. Cartwright] will introduce the Children's Savings Accounts Offer Parents Plenty Of Reasons To Understand aNd Invest in Tuition Yearly (CSA Opportunity) Act, which would right this wrong by exempting 529s and CSAs from asset limitations in common federal benefits.
Representative Cartwright is definitely on the right track here, but this is a very narrow improvement over current law. Congress has recognized his logic previously and exempted 529s from consideration in the SNAP program. That's not enough, parents eligible for assistance from more than one source are still restricted to the lowest effective asset limit, so a parent that also received heating or other assistance would still be dissuaded from saving into a 529. Where this approach has real potential is to make program administration and savings easier in communities that are operating (or considering operating) local CSA initiatives like the Kindergarten to College (K2C) initiative in San Francisco or the universal, 529-based Alfond Challenge in Maine. Families in those communities would be able to rest assured that they can join the mainstream and make savings contributions to their child's savings account and not cut themselves off from a needed lifeline. That would make a difference, but the Alfond Challenge expects to provide accounts to 12,000 babies each year, and there are 4,000,000 babies born every year in the US. While other states are moving to implement or consider similar CSA programs (Nevada and Connecticut, for example) these plans cover a very small minority of American children.
There are bigger issues too, going back to the 3 percent of parents that use 529s and Coverdells. The vast majority of those savers have very high incomes and are extremely unlikely to be subject to asset limits. Low- and moderate-income parents who are more likely to be eligible for public assistance are also much more likely to be saving for their child's education in a standard bank account. This is not an irrational approach, the tax benefits of 529s are skewed toward upper-income families and many lower-income families prefer to avoid market risk due to the precious nature of their resources. If the CSA Opportunity Act were to become law it would open the door to change, but improved uptake of 529s and savings rates would be slow to follow. In addition, there is a great deal of confusion among parents and case workers about the rules for saving and when they err, they cautiously err on the side of discouraging savings behavior. Carving out savings in 529s and CSAs could benefit some parents, but for most it will simply be another line on a form, adding to an already daunting application process and mixed messages about saving.
We need public policy to recognize these challenges and support parents as they choose to support their children's daily needs and aspirations for the future. Forcing families to choose between the two undercuts the future growth and development of those children and limits our nation's potential. The CSA Opportunity Act takes a small step toward making college savings possible for some parents; its intent is clear and laudable. Rep. Cartwright deserves credit for pushing this idea out there (and for repeatedly pushing pro-savings legislation).
To really make a difference we need to reform asset limits to allow and encourage savings and increased financial stability across the board. The message that parents who need public assistance receive now is "Don't you dare save." Changing that message to "Don't you dare save, except for your child's college" would be an improvement, but a much better message would be "You can and should be saving for your family's needs."
Justin King is policy director of the Asset Building Program at the New America Foundation. This piece originally appeared on the Asset Building Program's blog, The Ladder.