Tax Policy and Education Policy: Collision or Coordination? A Case Study of the 529 and Coverdell Saving Incentives
Abstract529 saving plans and Coverdell Educational Savings Accounts are marketed as attractive vehicles for college savings. The main finding of this paper is that college savings plans can actually harm some families. The joint treatment by the income tax code and financial aid system of college savings creates tax rates that exceed 100 percent for those families on the margin of receiving additional financial aid. Since even families with incomes above $100,000 receive need-based aid, the impact of these very high taxes is quite broad. I find that an aid-marginal family with funds in a Coverdell is worse off than if it did not save at all. Simulations show that $1,000 of pretax income placed in a Coverdell for a newborn and left to accumulate until college will face income and aid taxes that consume all of the principal, all of the earnings and an additional several hundred dollars. This perverse outcome is the product of poor coordination between the income tax code and the financial aid system.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10357.
Date of creation: Mar 2004
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Publication status: published as Dynarski, Susan M. “Tax Policy and Education Policy: Coordination or Collision?” Tax Policy and the Economy 18 (2004).
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Other versions of this item:
- 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.
- I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-03-07 (All new papers)
- NEP-EDU-2004-03-07 (Education)
- NEP-PBE-2004-03-07 (Public Economics)
- NEP-PUB-2004-03-14 (Public Finance)
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- Dynarski, Susan, 2004.
"Who Benefits from the Education Saving Incentive? Income, Educational Expectations and the Value of the 529 and Coverdell,"
Working Paper Series
rwp04-019, Harvard University, John F. Kennedy School of Government.
- 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.
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