March 22, 2000 | Center for Data Analysis Report on Education
S. 1134, the Affordable Education Act of 2000, passed on March 2 by the U.S. Senate, and companion bills in the U.S. House of Representatives would expand the eligibility criteria for educational savings accounts (ESAs).1 These tax-advantaged savings accounts, which first became available to taxpayers in 1998, now permit certain taxpayers to save for their child's college education with pre-tax dollars in exactly the same way taxpayers currently use IRAs for retirement savings. S. 1134 would add significantly to the types of educational expenses that qualify for this tax-advantaged treatment.
The Senate legislation also would substantially increase the number of children for whom educational savings accounts may be created. Current law restricts ESAs to the qualified parents of children attending publicly supported colleges and universities. S. 1134 would expand coverage by permitting parents of elementary, secondary, and private post-secondary students also to create educational savings accounts.
This CDA Report presents new estimates of the number of children for whom ESAs could be created. These estimates are presented in Table 1 by congressional district and by state. Table 1 shows that about 52 million children would be qualified now for expanded ESAs, which could cover expenses for elementary and secondary education. We estimate that about 32.2 million of these children could go on to college, during which some of their expenses could be met through ESAs.
Advocates of educational savings accounts argue that these tax-advantaged savings vehicles provide a new and important way for low- and middle-income families to save for their children's increasingly expensive education. Because the federal government will forgo taxes on the annual interest earned by the ESA until funds from the savings accounts are used, savings can grow more quickly. Reducing taxable income by allowing ESAs to be created from pre-tax dollars provides an additional incentive to save. Indeed, these two characteristics of ESAs could help take much of the uncertainly out of families' educational planning.
Critics of ESAs used to argue that these special-purpose IRAs benefit only wealthy taxpayers. However, recent research on state tuition and education savings plans shows that middle-income taxpayers participate heavily in tax-advantaged savings programs. For example, 71 percent of families participating in the Florida Prepaid College Program have annual incomes under $50,000, and 25 percent have incomes of less than $30,000. In the Pennsylvania plan, families with annual incomes of less than $35,000 have purchased 62 percent of the contracts. And the average family participating in Ohio's monthly installment college savings program has donated only $52 per month to its account.2
Middle-income taxpayers participate in these state plans because a solid education for their children significantly improves their children's lifetime earnings. The U.S. Bureau of the Census estimates that a high school degree could add $200,000 in lifetime earnings. Some college adds $170,000 more. And a college degree gives a child nearly a $500,000 advantage over those who do not graduate from a four-year, post-secondary institution. Indeed, the Census Bureau estimates that the lifetime earnings of a 1992 college graduate will be about $1,421,000.3
Table 1 shows the number of children who might benefit from expanded ESAs. It should be noted that this CDA Report does not calculate the financial benefits that might flow to families from this expansion. Nor does this Report present estimates of the number of families that would open an ESA, 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.4 The recognition that this trend of accumulating more and more debt for college might not be sustainable stands behind much of the current state and federal legislation.
The estimates in Table 1 are based on data from the 1999 March Current Population Survey produced by the Bureau of the Census, and on 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 equal to 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 poverty line.
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
For more information on this analysis, please click here for the PDF.
Rea S. Hederman, Jr., is a Policy Analyst in the Center for Data Analysis at The Heritage Foundation.
1. The legislation in the House that is most like S. 1134 is H.R. 7, the Education Savings and School Excellence Act of 1999, sponsored by Representative Kenny C. Hulshof (R-MO). The Taxpayer's Relief Act of 1997 included provisions that permitted taxpayers with incomes below $150,000 to create education IRAs.
2. 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.
3. U.S. Department of Commerce, Economics and Statistics Administration, Bureau of the Census, "More Education Means Higher Career Earnings," Statistical Brief, August 1994, at /static/reportimages/8FAE3B2A3CC1B7DA96762F13C224FA89.pdf (downloaded March 20, 2000).