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

  • Dynarski, Susan

    (Harvard U)

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.

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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp04-019.

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Date of creation: Apr 2004
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Handle: RePEc:ecl:harjfk:rwp04-019
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  1. 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.
  2. 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.
  3. 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.
  4. 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.
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