As the student debt crisis gets tossed around like a political hot potato, solutions are coming in and out of focus every day. Debt forgiveness for some. Free tuition, soon. Just in the past few days, President Biden has been reprimanded for omitting student loan forgiveness from the budget plan.
So what can we say of real use to families stressed about having their kids join the 45 million Americans who are currently burdened with over $1.7 trillion in student loan debt? The truth is the government has created a tool for families to address this exact problem, but it doesn’t seem to get much media coverage. It’s no wonder that the families who could benefit the most don’t even know about it. So what’s the secret that can save our children from being mired in debt, just as their adult lives are about to start, and that only one in three Americans know about?
It’s a 529 account, an education savings vehicle that lets families invest their money tax-free. Tax-free investing is incredibly powerful: a parent putting in $25 each month could see that grow to more than $8,000 over 15 years!
Tomorrow is National 529 Day, May 29, the one day a year when we try to put a spotlight on this wildly underused public benefit for affording college, K-12 tuition, apprenticeships, and even paying off some student loan debt.
The government has been consistently expanding the ways that families can use 529s. Yet we’re continually surprised by how little attention 529s get, and how complex the process can be if you try to start one for your own family. I’ve had so many conversations with young parents saying they delayed opening an account for years, just because they couldn’t get their head around how it worked.
If you’re going in blind, it can be a bit of a labyrinth: every individual state except one has at least one version of a 529 to offer you, each with a slightly different set of rules and requirements. Many families end up hiring an accountant or financial advisor to wade through the information, and too many simply give up.
That’s why I started Backer, to take control of the process for families who want to secure their children’s education in a few clicks. By making the 529 enrollment process super easy and letting our savers involve family and friends in the process, we’ve helped their kids avoid over $50 million in debt. We’ve also expanded the universe of families able to access 529 accounts – 70% of Backer users have a household income below 100k, 60% are women, and 50% are non-white.
Alongside a service like ours, it is also the responsibility of the government to increase 529 awareness. The states that run 529 programs have actually stepped up repeatedly, offering tax incentives to use their plans and even innovating new kinds of savings programs. States like Oklahoma – and many cities and states throughout the country – have been doing a great job opening college funds for newly born children. All of this is helping prevent the student debt crisis from getting even worse, but these initiatives rarely get the media attention they deserve.
Another problem is that 529s have a reputation – only partly deserved – for being a thing that only rich people use. Millions of middle-class American families use 529s to save for their kids’ education, but it is true that they are less popular among lower-income families. The state 529 programs are aware of the problem and are working to address it, but fundamentally this is not a problem with the vehicle itself. And many studies have shown that when a lower-income family saves for education, it has a dramatically positive effect on the child’s aspirations and the overall health and wellness of the family.
Not to mention: for children from low and moderate-income households, even a savings of less than $500 in a college fund can make them three times more likely to go to college, and four times more likely to graduate. Now that is tangible impact!
We need to see more bipartisan efforts to raise awareness of 529 plans and make them a public benefit that benefits all families, regardless of their financial means. One positive development is a recent bill by Rep. Spanberger to expand 529s so that they can be used for training and credentialing programs.
All these strategies would help see more people open a 529 account than the mere 16% of US parents that use them today.
Families – especially lower and moderate-income ones – deserve to know how college savings accounts can change their lives. Higher education is still the primary vehicle for upward mobility in the United States and a 529 is the driver that can get you there. We hope you’ll join our effort to spread the word.
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