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

45 Pages Posted: 14 Jun 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: April 2004

Abstract

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 an ESA or 529. Since the highest-income families are unaffected by this aid tax, this further intensifies the positive correlation between income and the advantages of the tax-advantaged college savings accounts.

Suggested Citation

Dynarski, Susan M., Who Benefits from the Education Saving Incentive? Income, Educational Expectations and the Value of the 529 and Coverdell (April 2004). KSG Working Paper No. RWP04-019. Available at SSRN: https://ssrn.com/abstract=556292 or http://dx.doi.org/10.2139/ssrn.556292

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 )

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

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