The Heritage Foundation

Center for Data Analysis Report #98-07 on Education

September 25, 1998

September 25, 1998 | Center for Data Analysis Report on Education

Who Would Benefit From Prepaid College Tuition Plans?

In 1997, Congress enacted legislation to provide taxpaying Americans with new ways to save for their children's college education. Specifically, Congress created tax-advantaged "education IRAs" in the Taxpayer's Relief Act of 1997, increasing the attractiveness of state-sponsored tuition savings and prepayment plans. Many Members of Congress now want to expand these opportunities.

Advocates of expansion claim that these plans will make it easier for families to save for college and will take the uncertainty out of planning for future costs of college education. They argue that it is time for Congress and President Bill Clinton to eliminate the double taxation of interest earned through these programs and end the tax disparity that currently exists between public and private colleges.

Indeed, the House Ways and Means Committee recently adopted, as part of its $80 billion tax-cut package, a modest expansion of tuition savings and prepayment plans. H.R. 4579 would extend the same tax treatment that state-sponsored plans enjoy under the current law to plans at private colleges and universities.

Under this legislation, federal income tax on all interest earned through the plans--whether public or private--would be deferred until the student enrolls in college. The committee's proposal, however, does not go far enough for some Members who want to make all earnings through all of the tuition savings and prepayment plans tax-free, thus vastly expanding their benefits to participating families and children.1

How many children would benefit from the universal availability of tax-advantaged tuition savings and prepayment plans? A Center for Data Analysis study shows that about 30 million children could benefit, as demonstrated in the attached table by state and congressional district.

It should be noted that this study does not calculate the financial benefits that might flow to families from expanding tuition savings and prepayment plans, although the numbers doubtless are significant. American families accumulated more college debt during the first five years of the 1990s than in the previous three decades combined.2 Recognizing that this trend cannot continue, several states have established tuition savings and prepaid tuition plans.3

A common criticism of educational savings accounts is that they are a tax break solely for the rich and upper class, so not many children will benefit from them. However, the experience of the existing state plans indicates that working, middle-income families represent a significant portion of participants.4 For example, families with annual incomes of less than $35,000 purchased 62 percent of the prepaid tuition contracts sold by Pennsylvania in 1996. The average monthly contribution to a family's college savings account during 1995 in Kentucky was $43.

The attached table shows the number of children who stand to benefit from expanded educational savings accounts and tuition prepayment plans.

METHODOLOGY

The data in the attached table came from the 1997 March Current Population Survey produced by the Bureau of the Census, and other data tabulated by the Census Bureau for The Heritage Foundation.5

Children were considered eligible if they were members of a family that had an annual monetary income of at least 125 percent of the poverty threshold.6 The analysis was conducted at the state level, which gave the aggregate number of children eligible. The children were distributed based on each district's percentage of children above the 125 percent of poverty level.

Finally, the number of children in each district was multiplied by the percentage of eligible high school graduates in 1994 who went on to attend college in that state.7

-- Rea S. Hederman is a Research Analyst in the Center for Data Analysis at The Heritage Foundation.


Table:

Number of Children Who Could Benefit from Prepaid Tuition Plans (1997)
(306k HTML)


Number of Children Who Could Benefit from Prepaid Tuition Plans (1997)
(306k HTML)


Endnotes

1. John S. Barry, "Why Congress Must Fix the Tax Bill's Educational Savings Plans," Heritage Foundation Executive Memorandum No. 491, September 3, 1997. Legislation has been introduced by Representatives Bill Archer (R-TX), Kay Granger (R-TX), Philip English (R-PA), and Gerald Weller (R-IL), and Senators Jeff Sessions (R-AL), William Roth (R-DE), Bob Graham (D-FL), Mitch McConnell (R-KY), Paul Coverdell (R-GA), Thad Cochran (R-MS), Rod Grams (R-MN), and Spencer Abraham (R-MI).

2. "College Debt and the American Family," Report from the Education Resources Institute and the Institute for Higher Education Policy, September 1995, p. 6.

3. For an overview of the state-based plans, see College Savings Plans Network, National Association of State Treasurers, Special Report on State College Plans (Lexington, Ky.: Council of State Governments, 1996).

4. Nina H. Shokraii and John S. Barry, "Education: Empowering Parents, Teachers, and Principals," in Stuart M. Butler and Kim R. Holmes, eds., Issues '98: The Candidate's Briefing Book (Washington, D.C.: The Heritage Foundation, 1998), p. 280.

5. Data available upon request from the author.

6. At 125 percent of the poverty level, there is a notable increase in the number of tax filers who could realize tax savings from these plans.

7. "Quality Counts," Education Week, Vol. XII, No. 17 (January 8, 1998), p. 79.

About the Author

Rea S. Hederman, Jr. Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis