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Florida Tax Review

Abstract

This paper will focus on one such tax incentive—the tax preferred college savings plan, or 529 plan—and its current and potential impact on higher-education participation rates among low- and moderate-income students.

This article will synthesize and describe the existing literature attempting to explain the low participation in higher education among low-to-moderate-income students, despite economic models that indicate that participation should be equivalent across income levels. Building on the recommendations stemming from the literature, which suggests that grants are the best way to increase those participations rates, I will argue that 529 college savings plans can, with important changes from their current structure, be a similar but more powerful tool than direct grants. In conclusion, the paper will attempt to illustrate one possible revenue-neutral plan for the federal government making use of 529 plans. The example will show that a 529 plan with an initial contribution from the government offered to every low- and moderate-income child, and matching grants annually, can increase enrollment among this group of students by almost five percentage points. This increase would far outpace any seen over the previous two decades, and yet is obtained using a very small portion of the total federal financial aid program.

Such an increase would have positive impacts on social equality and mobility and offer substantial monetary benefits to those affected. The increased enrollment would also have widespread societal benefits like raising all wages, reducing healthcare costs, and increasing volunteerism and civic participation.

This article offers a revenue-neutral proposal for amending 529 plans simply to show the additional impact that the same amount of money could have if targeted differently. This paper argues, however, that these 529 plans are the most efficient way to offer financial aid incentives because they lead to the largest effective grant. I would therefore advocate for an increased amount of federal funding to be directed at these plans, either as increased spending on educational incentives or redirected from other programs. However, it is beyond the scope of this paper to analyze all of the financial aid programs and whether or how much of that funding would be better allocated to 529 plans.

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