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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

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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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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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Handle: RePEc:nbr:nberwo:10470

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Find related papers by JEL classification:
I22 - Health, Education, and Welfare - - Education - - - Educational Finance
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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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. [Downloadable!] (restricted)
  2. Edlin, Aaron S, 1993. "Is College Financial Aid Equitable and Efficient?," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 143-58, Spring. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. John Hartman, 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 15-07, Department of Economics, UC Santa Barbara. [Downloadable!]
  2. Waddell, Glen R. & Singell, Jr., Larry D., 2009. "Do No-Loan Policies Change the Matriculation Patterns of Low-Income Students?," IZA Discussion Papers 4362, Institute for the Study of Labor (IZA). [Downloadable!]
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