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.
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. Recognizing that this trend
cannot continue, several states have established tuition savings
and prepaid tuition plans.
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. 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
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.
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. 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.
-- is a Research Analyst in the Center for Data
Analysis at The Heritage Foundation.