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Trump promised an investment in school choice for poor families – a 529-plan expansion doesn't cut it.
President Donald Trump’s improbable election was supposed to make 2017 the year that private-school choice finally made the national stage. In his campaign, Trump promised a whopping $20 billion federal investment in school choice. He backed up that promise in his first speech before a joint session of Congress, promising a major investment focused on needy students, and by appointing Betsy DeVos, an ardent school choice supporter, to the helm of the Department of Education. These federal overtures on private-school choice, which has grown substantially over the past few decades because of state-led efforts, animated opponents to marshal resistance and supporters to discuss both whether and how federal efforts could propel private-school choice forward.
If school choice came into 2017 with a roar, it is certainly going out with a whimper. After the Republican House and Senate passed a budget in October with none of the choice proposals included in the administration’s budget outline, tax reform appeared as the most likely legislative vehicle to deliver on school choice. However, the Tax Cut and Jobs Act arrived in conference committee last week with the Trump administration’s stated school-choice priorities on the cutting room floor. No billions invested in school choice. No focus on poor students. The only remnant of federal school-choice efforts came from a late breaking amendment from Sen. Ted Cruz that would expand 529 college-savings plans so families could use them for K-12 expenses like private-school tuition.
Some advocates are celebrating this as a game changer for school choice and a major win for American families. Others – who view it as a modest step forward on choice – may take comfort in the idea that 529 expansion is an appropriate step for a federal government that respects its limited role. Unfortunately, it is neither of these things. It will do little to boost choice and it substantially interferes with state decisions regarding private-school choice.
Understanding how 529 plans work is essential to understanding why changing them won’t. Originally, 529 plans let families deposit after-tax dollars into a savings account for a child’s college expenses. Through the power of compound interest, those contributions accrue earnings, slowly at first, but more rapidly over longer periods. This combination of long terms for interest to accrue and steady contributions makes 529 plans well-suited to pay for college expenses. The federal benefit from 529 plans is that when families spend these funds on college expenses, they pay no taxes on those earnings.
However, these same features are precisely what make 529s ill-suited for K–12 expenses, which families face much sooner. Preston Cooper and I have illustrated how much of a difference early withdrawals can make. Disciplined savers who put $250 a month into a 529 plan from a child’s birth stand to receive a federal tax benefit on college expenses of about $8,000, with plenty of funds to pay for college and some graduate school. Using 529 funds for high-school tuition would trim their benefit to about $6,000, and the account would run dry in the third year of college. Used for elementary school, the benefit shrinks to below $1,400 and funds run out by fourth grade.
The benefits shrink dramatically because 529s are a benefit for investments, and an investment vehicle just does not work over short periods. The irony is that K-12 tax benefits from 529 “college-savings” plans would come at the expense of 529 savings for college.
But the larger irony is that these federal changes to 529s will derive most of the benefits for families from state treasuries, not the federal treasury. Supporters rightly point out that states offer various state-tax benefits – at least 20 allow deductions of tens of thousands annually and several offer state-tax credits – for 529 contributions. These deductions mean families put pre-state-tax dollars into a 529 account, which translates into upfront savings on state income taxes that don’t depend on long-term investments. This means that families who now pay private school tuition could put it first into a 529 account pre-state-tax, and use 529 funds for private-school tuition. This could lead to substantially or completely state-tax-free tuition, which are savings for families with the means to pay for private school, and liabilities for states tax revenues.
Arguments that lean on these 529 state-tax advantages as reasons to change the federal tax code raise questions about whether it’s appropriate for Congress, especially a Republican one, to make substantial impacts on state-tax receipts. Congress is looking to change 529s from an incentive to save for college into a means by which private-school families might avoid state taxes – and you can expect thousands more families to open 529s just to do so. You don’t have to be a tax lawyer to see that a federal change on 529s will disproportionately affect state treasuries, or to question whether Congress should unilaterally bring these changes to unwitting states.
The administration promised a large investment in school choice for poor families who could not otherwise afford it. This 529 expansion neither expands choice nor helps poor families. The vast majority who benefit will be those already paying to attend private schools. The major flaw in the 529 expansion is that it undermines school choice for those who don’t already have it. It allows Republicans to claim they support school choice without any meaningful federal outlays, and worse, it plays into the hands of critics who argue that school choice is a giveaway to relatively wealthy families.
Getting functional, sustainable school-choice measures passed is a tough task, and I solute those committed to the hard work of spreading opportunity to those who otherwise would not have it. Settling for pyrrhic school-choice victories like 529 expansion works against that kind of school choice in the long run, and doesn’t deserve support in Congress.
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Education Savings Accounts: The New Frontier in School Choice
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