No clear answer on how families will use 529 accounts

Dive Brief:

An official of the National Conference of State Legislatures told lawmakers attending the organization's annual summit in Los Angeles this week that federal changes allowing families to withdraw money from 529 plans for private K-12 schools could impact states by adding to administrative costs and reducing revenues because of tax deductions. 529 funds were originally intended to help families save for college for children.
Joan Wodiska, a senior federal affairs counsel with NCSL, also said that Wall Street is watching how states are managing these funds, and is particularly interested in whether fund managers are highly experienced and whether the funds are insulated against political swings.
With 529 plans, state are managing roughly $277 billion in assets, Wodiska said. "It's not a sleepy little marketplace," she said. "This is an opportunity for you to evaluate how the program is functioning and who is managing the funds," she said, adding that while states have little information on how many parents will take advantage of the new allowable expenses, in six months, the picture may be clearer.

Dive Insight:

The federal government created modern 529 savings plans in the mid-1990s to allow families to put away money for college expenses and allow the funds to grow tax free. As an added incentive, more than 30 states offer tax breaks to those who put money into 529 accounts.

State officials across the country are increasingly worried that a provision in the 2017 tax law extending 529 accounts to private secondary school expenses will blow an unexpected hole in their budgets. In December, as part of a broad tax overhaul, Congress expanded the accounts to cover up to $10,000 a year in expenses for private K-12 schools. Critics say this could result in potentially millions of dollars in lost tax revenue at a time when most states are struggling with budget deficits.

Indiana, which offers a $1,000 tax credit to anyone putting money in a 529 account, could lose $117 million a year, according to an estimate by Nat Malkus, deputy director of education policy at the American Enterprise Institute, a center-right think tank, in a Wall Street Journal article. Pennsylvania could stand to lose $92 million, Malkus said.

Colleges now have to confront a major financial aid question, and states could make offsetting tax changes that cost 529 savers money.

Monica Herk, the Committee for Economic Development's vice president of education research, said there are three recommendations in particular Congress should consider. She advocated for a proposal to establish Lifetime Learning Accounts, which would replace 529s and similar state-sponsored plans and serve as a singular destination for all grants, scholarships, student loans and family contributions to allow families to have all available school funding in one place.