If somewhere there is a remedial class for state legislators who rewrite tax law without fully comprehending the ramifications of their actions — preferably online instruction, of course — members of the Maryland General Assembly should be required to enroll. In recent years, lawmakers have twice tinkered with Maryland’s 529 college savings plans to add, and then expand, an extra incentive: If certain income-qualified families opened up a child’s 529 account with at least $100, taxpayers would kick in up to $500 to get things started. Sounds great, right? Turns out, a little too great. Some families have figured out that they could sign their children up multiple times. As The Sun’s Liz Bowie has reported, in at least one family that meant establishing dozens of separate accounts to cover each of four children at a cost to the state of $97,500. That’s the kind of windfall that is normally reserved for lottery winners.
When Maryland first established a 529 plan 22 years ago, we were highly supportive. After all, encouraging tax-free savings to finance college education seemed like a win-win. It rewarded the responsible behavior of gradually setting aside money to cover the cost of a college degree while freeing up financial aid programs for low-income families that can’t afford to put money aside no matter what tax incentives are offered. And it’s certainly proven to be popular. Today, the two Maryland 529 plans, the Prepaid College Trust and the College Investment Plan, have between them more than $7.4 billion in assets (as of 2019 anyway) covering more than 247,000 beneficiaries.
But two developments give us pause. The first is easily mended. Clearly, the program was never designed to extend a $97,500 benefit to one family and lawmakers need merely approve a fix, Senate Bill 615 or House Bill 532, to cap the benefits any recipient can receive in a given year. But the second is a little more difficult. Under a change in federal tax law that went into effect in 2018, as much as $10,000 can be withdrawn annually from 529 accounts to pay for K-12 private school. We have nothing against private schools, but directing tax-free savings including outright taxpayer subsidies to cover private school tuition for families of means (who earn as much as $175,000 annually in the case of the Maryland 529) is a little difficult to swallow. Is that really the best use of limited tax dollars for education?
There’s no question that college affordability continues to be a difficult challenge in this country. Student loan debt is estimated to be at a record high of $1.5 trillion and affects some 44 million Americans. Yet the problem with 529 plans is that too often they are enabling the wealthiest among us to pay for an education they could afford anyway but to use tax-free dollars in the process. While lawmakers who choose to sweeten the college savings plans or cap tuition may genuinely believe they are striking a blow against student debt, their strategies need to be reexamined. What ought to be the focus is making college affordable for low-income students through grants, scholarships and other forms of financial aid. Instead, too many tax dollars end up being used to provide tax breaks to the affluent and capped tuition prices that, while certainly helping the middle class and below, also greatly benefit the upper middle class and above.
It’s unfortunate that somewhere in Maryland there’s a family who thought it was perfectly fine to establish dozens of 529 plans for their children in order to leverage tens of thousands of dollars from the state. That was clearly never the intent of the law. But it’s really much more shameful that the people in charge of writing tax law did not consider that some people (or at least some sharp tax lawyers or financial advisers) would not figure out how to game the system. The Maryland 529 plans have helped hundreds of thousands of young people pay for college, including many who did not need the assistance. Meanwhile, there are still individuals living in this state who would benefit from a four-year college degree but can’t possibly afford to enroll in such a school, as well as many who can afford to enroll but only by assuming a crushing level of debt. They must be asking themselves today: When do they get their windfall from Annapolis?