Who Benefits from the Education Saving Incentive? Income, Educational Expectations and the Value of the 529 and Coverdell
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 ESA or 529. Since the highest-income families are unaffected by this aid tax, this further intensifies the positive correlation between income and advantages of the tax-advantaged college savings accounts.
|Date of creation:||Apr 2004|
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NBER Working Papers
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- 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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