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Who Benefits from the Education Saving Incentives? Income, Educational Expectations, and the Value of the 529 and Coverdell

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  • Susan M. Dynarski

Abstract

This paper examines the incentives created by the 529 and Coverdell tax-advantaged savings accounts. I find that the advantages of the 529 and Coverdell rise sharply with income, for three reasons. First, those with the highest marginal tax rates benefit the most from sheltering income, gaining most in both absolute and relative terms. Second, the tax penalties that are assessed on families whose children do not use their Coverdell accounts to pay for college hit some families harder than others. Strikingly, those in the top two tax brackets benefit more from non-educational use of a Coverdell than those in the bottom bracket gain from its educational use. Finally, the college financial aid system reduces aid for those families that have any financial assets, including an ESA or 529. Since the highest-income families are unaffected by this aid tax, this further intensifies the positive correlation between income and the advantages of the tax-advantaged college savings accounts.

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  • Susan M. Dynarski, 2004. "Who Benefits from the Education Saving Incentives? Income, Educational Expectations, and the Value of the 529 and Coverdell," NBER Working Papers 10470, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:10470
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    References listed on IDEAS

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    1. Susan Dynarski, 2004. "Tax Policy and Education Policy: Collision or Coordination? A Case Study of the 529 and Coverdell Saving Incentives," NBER Chapters, in: Tax Policy and the Economy, Volume 18, pages 81-116, National Bureau of Economic Research, Inc.
    2. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
    3. Dick, Andrew W. & Edlin, Aaron S., 1997. "The implicit taxes from college financial aid," Journal of Public Economics, Elsevier, vol. 65(3), pages 295-322, September.
    4. Aaron S. Edlin, 1993. "Is College Financial Aid Equitable and Efficient?," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 143-158, Spring.
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    Cited by:

    1. David Deming & Susan Dynarski, 2009. "Into College, Out of Poverty? Policies to Increase the Postsecondary Attainment of the Poor," NBER Working Papers 15387, National Bureau of Economic Research, Inc.
    2. Vicki L. Bogan, 2014. "Savings Incentives And Investment Management Fees: A Study Of The 529 College Savings Plan Market," Contemporary Economic Policy, Western Economic Association International, vol. 32(4), pages 826-842, October.
    3. Zhan, Min & Sherraden, Michael, 2011. "Assets and liabilities, educational expectations, and children's college degree attainment," Children and Youth Services Review, Elsevier, vol. 33(6), pages 846-854, June.
    4. Jin Huang & Yunju Nam & Michael Sherraden & Margaret Clancy, 2015. "Financial Capability and Asset Accumulation for Children's Education: Evidence from an Experiment of Child Development Accounts," Journal of Consumer Affairs, Wiley Blackwell, vol. 49(1), pages 127-155, March.
    5. Manasi Deshpande & Rebecca Dizon-Ross, 2023. "The (Lack of) Anticipatory Effects of the Social Safety Net on Human Capital Investment," NBER Working Papers 31512, National Bureau of Economic Research, Inc.
    6. Vivian Yuen Ting Liu, 2020. "Is School Out for the Summer? The Impact of Year-Round Pell Grants on Academic and Employment Outcomes of Community College Students," Education Finance and Policy, MIT Press, vol. 15(2), pages 241-269, Spring.
    7. Chen, Zibei & Elliott, William & Wang, Kaipeng & Zhang, Anao & Zheng, Haotian, 2020. "Examining parental educational expectations in one of the oldest children’s savings account programs in the country: The Harold Alfond College Challenge," Children and Youth Services Review, Elsevier, vol. 108(C).
    8. Beverly, Sondra G. & Kim, Youngmi & Sherraden, Michael & Nam, Yunju & Clancy, Margaret, 2015. "Can Child Development Accounts be inclusive? Early evidence from a statewide experiment," Children and Youth Services Review, Elsevier, vol. 53(C), pages 92-104.
    9. Kim, Youngmi & Huang, Jin & Sherraden, Michael & Clancy, Margaret, 2017. "Child Development Accounts, parental savings, and parental educational expectations: A path model," Children and Youth Services Review, Elsevier, vol. 79(C), pages 20-28.
    10. Waddell, Glen R. & Singell Jr., Larry D., 2011. "Do no-loan policies change the matriculation patterns of low-income students?," Economics of Education Review, Elsevier, vol. 30(2), pages 203-214, April.
    11. Adam M. Lavecchia & Heidi Liu & Philip Oreopoulos, 2014. "Behavioral Economics of Education: Progress and Possibilities," NBER Working Papers 20609, National Bureau of Economic Research, Inc.
    12. Nicholas W. Hillman & Erica Lee Orians, 2013. "Financial Aid's Role in Meeting State College Completion Goals," Education Finance and Policy, MIT Press, vol. 8(3), pages 349-363, July.
    13. Susan Dynarski & Judith Scott-Clayton, 2016. "Tax Benefits for College Attendance," NBER Working Papers 22127, National Bureau of Economic Research, Inc.
    14. Alberto Martini & Davide Azzolini & Barbara Romano & Loris Vergolini, 2021. "Increasing College Going by Incentivizing Savings: Evidence from a Randomized Controlled Trial in Italy," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 40(3), pages 814-840, June.
    15. Catherine A. Manly & Ryan S. Wells & Genia M. Bettencourt, 2017. "Financial Planning for College: Parental Preparation and Capital Conversion," Journal of Family and Economic Issues, Springer, vol. 38(3), pages 421-438, September.
    16. Hartman, John Lawrence, 2007. "The Relevance of Heterogeneity in a Congested Route Network with Tolls: An Analysis of Two Experiments Using Actual Waiting Times and Monetized Time Costs," University of California at Santa Barbara, Economics Working Paper Series qt22b46341, Department of Economics, UC Santa Barbara.

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    More about this item

    JEL classification:

    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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