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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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10470.

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Date of creation: May 2004
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Publication status: published as Dynarski, Susan. "Who Benefits From The Education Saving Incentives? Income, Educational Expectations And The Value Of The 529 And Overdell," National Tax Journal, 2004, v57(2,Jun), 359-383.
Handle: RePEc:nbr:nberwo:10470

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  1. Susan M. Dynarski, 2004. "Tax Policy and Education Policy: Collision or Coordination? A Case Study of the 529 and Coverdell Saving Incentives," NBER Working Papers 10357, National Bureau of Economic Research, Inc.
  2. Andrew W. Dick & Aaron S. Edlin, 1995. "The Implicit Taxes from College Financial Aid," NBER Working Papers 5316, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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.
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Cited by:
  1. 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.
  2. 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.
  3. 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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