Kennedy School Researchers Examines Educational Savings Programs

Contact: Doug Gavel
Phone: 617-495-1115
Date: April 29, 2004

CAMBRIDGE, MA – Two major U.S. tax-advantage savings account programs are more likely to benefit higher-income parents than lower- and middle-income parents. That’s the conclusion in a new study authored by Kennedy School of Government Assistant Professor Susan Dynarski.
Dynarski examined the incentives created by the Coverdell Education Savings Account (ESA) and the 529 savings plan. She found that the financial advantages of both accounts rise sharply with income.
Dynarski finds that the parents of a high school senior who attends four years of college can face a per dollar reduction in need-based aid of 15 cents if the funds are held in a 529 savings plan, between 26 and 39 cents if the funds are held in an IRA, and 40 cents if the funds are held in a mutual fund account in the parents’ name. Funds held in a Coverdell educational savings account can reduce need-based aid by $1.22 per dollar saved. (The treatment of Coverdell savings accounts changed in early 2004, after this paper was completed.) Funds held in a Uniform Transfer to Minors Act account can reduce aid by as much as $1.24.
Three major reasons are cited as primary factors for these findings:
Those with the highest incomes (and therefore highest tax rates) benefit most from sheltering income.
Tax penalties assessed on families whose children do not use their Coverdell accounts to pay for college hit some families harder than others.
The college aid system, as currently structured, reduces financial aid for those families that have financial assets, including ESAs or 529s. Since the highest-income families are unaffected by this aid tax, this further intensifies the correlation between income and positive effects from the tax-advantaged college savings accounts.
“The implication of these findings for families is significant,” Dynarski said. “Families should save for college, but carefully. Given the way the aid rules are currently written, no family should put college savings in their child's name. For each dollar held by a child, well over a dollar in aid can be lost over the course of a four-year college career.
“Low-income families, who need the most help with college costs, benefit little from the education savings accounts. If the intent of the 529 and Coverdell was to increase college-going, they are a failure. If their intent was to provide a tax break to well-off families, they are a roaring success,” she said.
Dynarski’s research on college savings is accessible through the Kennedy School’s Working Papers website:


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