Mass. should offer tax incentives for college savings
State is 1 of 8 that doesn't offer middle class support
NATIONAL AND STATEWIDE conversations around higher education have underscored two realities: a college degree is increasingly important in a knowledge-based global economy, and we need to do more as a society to make college affordable for talented young people. Families in Massachusetts know that their children’s future is dependent on a college education, making it a critically important investment.
Thanks to one federal program, families nationwide have an added incentive to begin saving for a child’s education as soon as he or she is born. Section 529 of the IRS Code created so-called 529 College Savings Plans, which offer families a tax deduction for money they set aside for college. The incentive has been widely successful, especially for middle class families who often find themselves too “rich” to qualify for need-based aid but not wealthy enough to make full tuition payments without considerable sacrifice.
Studies show that a child with any amount saved for higher education is six to seven times more likely to attend a four year college than those without any savings. Not only does private saving for college reduce the amount of borrowing that a student may need during their college career, it also frees up institutional merit aid that can then be applied towards need-based aid for other students.
It’s little wonder that President Obama’s proposal earlier this year to roll back the 529 tax incentive caused an immediate uproar among Republicans and Democrats alike. This was followed by an abrupt about-face by the administration.
That brings us to Massachusetts. Complementing the successful federal tax incentives, 34 states across the country, plus the District of Columbia, have adopted programs that offer income tax deductions for qualified contributions to 529 plans.
Massachusetts should join these ranks.
Forty-two states and the District of Columbia levy state income taxes. Of those, Massachusetts is one of only eight states that does not provide a 529 college savings incentive. Every one of its neighboring states (save for New Hampshire, which does not have an income tax) does much more than Massachusetts to help its families save for college.
The real difference gained from this savings is hard to ignore. When interest earned on 529 savings is factored in, the financial benefits of saving for college go far beyond actual dollars set aside. The Massachusetts Educational Financing Authority (MEFA) illustrates this with a stunning example: a family’s $6,906 in college savings, accumulated over 10 years, could amount to $10,000 with interest and earnings; whereas taking out a $10,000 student loan would, after interest payments, saddle the student with a debt of $13,920. Over time, putting aside $6,906 for college ends up saving that student more than $7,000.
When it comes to economic strength, a vibrant middle class is essential, and it is predominately middle class families that take advantage of these incentives. A recent study showed that over 72 percent of households participating in the federal 529 program make less than $150,000 a year.
Following the lead of 35 other states across the country that offer these tax breaks should be a priority for Massachusetts, and a number of legislators across the state agree. This year, seven different bills have been filed that would implement various levels of college savings tax incentives, and lawmakers from both sides of the aisle have expressed support for such proposals. The Legislature would be wise to move this kind of reform to the top of our state’s agenda.
The cradle to career approach, which 529s encourage, is not the only way we should be helping our young people pay for college. In the past 12 months, three separate independent commissions issued reports that recommend a substantial increase in funding for need-based scholarship programs in addition to incentives that would encourage 529 college savings. Further recommendations included increasing financial literacy programs and assisting students in completing their college degrees on time, among others.
Many states have caught on to the high value of 529 college savings incentives. It’s time that Massachusetts does the same.
Richard Doherty is president of the Association for Independent Colleges and Universities in Massachusetts (AICUM), representing 59 independent colleges and universities throughout the Commonwealth.