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Maryland lawmakers ending college savings loophole that sent nearly $100K in state money to one family

Maryland lawmakers working to close a loophole that allowed families to amass thousands of dollars in state aid to bolster their children’s educational savings accounts.

For years, Maryland parents have been able to open college savings accounts called 529 plans to pay for their children’s education. The account holder can invest the money within and any earnings are tax-free, and withdrawals are not taxed if spent on education expenses. Recent tax law changes now allow the money to also be used for private school tuition.

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Maryland’s lawmakers wanted to nudge more parents into opening plans by adding another incentive for accounts opened starting in 2017: a modest donation from the state into the child’s fund.

Families that opened accounts for their children could receive either a $250 or $500 payment from the state into the account each year, depending on their income, provided they make their own minimum contribution.

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Some parents quickly found a way to take advantage of the state’s contribution, opening multiple accounts for their children and thus getting multiple state matches.

In one family, adults opened 195 total accounts for four children, ultimately receiving $97,500 in state matches, according to nonpartisan analysts.

While that example was “particularly extreme,” analysts noted a trend of families opening multiple accounts for children.

State lawmakers required the governor to put at least $3 million into the budget each year to pay for the matches, but the actual amount of matches has far exceeded that number, including $12.5 million this year.

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Lawmakers considered a bill to close the loophole last year, and it was approved by the Senate but ran out of time for full passage as the legislative session was cut short due to the arrival of the coronavirus. Lawmakers inserted a temporary fix into the state budget, limiting the state matches to two per account.

This year’s legislation aims to make a permanent fix and is well on its way to passage. Versions of the bill have separately passed the House of Delegates and state Senate on unanimous votes. They’re now working their way through the opposite chamber.

The legislation would set a lifetime cap of $9,000 in state matches per child, and tighten eligibility requirements.

Del. Cathi Forbes, a Baltimore County Democrat, told her colleagues during a hearing last month the changes could save the state millions while keeping the “original spirit and intent of the legislation” to help low- and moderate-income families save for tuition.

The goal, Forbes said, is to “keep this good idea and end the abuse.”

Sen. Sarah Elfreth, the lead sponsor in the Senate, said during a hearing last month that the changes will ensure that the state money goes to families that need it most.

“The intention here was to create a match program that would incentivize the start of the savings plan and then help out along the way,” said Elfreth, an Anne Arundel County Democrat. “It was not to be a cash cow for many families.”

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