Tax Policy and Education Policy: Collision or Coordination? A Case Study of the 529 and Coverdell Savings Vehicles

47 Pages Posted: 17 Mar 2004

See all articles by Susan M. Dynarski

Susan M. Dynarski

National Bureau of Economic Research (NBER); University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; University of Michigan at Ann Arbor - School of Education

Date Written: February 26, 2004

Abstract

529 saving plans and Coverdell Educational Savings Accounts are marketed as attractive vehicles for college savings. The main finding of this paper is that college savings plans can actually harm some families. The joint treatment by the income tax code and financial aid system of college savings creates tax rates that exceed 100 percent for those families on the margin of receiving additional financial aid. Since even families with incomes above $100,000 receive need-based aid, the impact of these very high taxes is quite broad. I find that an aid-marginal family with funds in a Coverdell is worse off than if it did not save at all. Simulations show that $1,000 of pretax income placed in a Coverdell for a newborn and left to accumulate until college will face income and aid taxes that consume all of the principal, all of the earnings and an additional several hundred dollars. This perverse outcome is the product of poor coordination between the income tax code and the financial aid system.

Keywords: Economics, Microeconomics, Education Policy

Suggested Citation

Dynarski, Susan M., Tax Policy and Education Policy: Collision or Coordination? A Case Study of the 529 and Coverdell Savings Vehicles (February 26, 2004). KSG Working Paper No. RWP04-011. Available at SSRN: https://ssrn.com/abstract=517663 or http://dx.doi.org/10.2139/ssrn.517663

Susan M. Dynarski (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

735 South State Street, Weill Hall
Ann Arbor, MI 48109
United States

University of Michigan at Ann Arbor - School of Education ( email )

610 East University Avenue
Ann Arbor, MI 48109-1259
United States

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