CSPN - College Savings Plans Network
Blog Facebook Twitter YouTube

History of 529 Plans

Over the past 40 years, college tuition rates have been consistently increasing at two to three times the rate of inflation each year. During this same period of time, federal financial aid funding has shifted away from student grants to providing access to guaranteed student loans. Today, nearly 60% of all federal financial aid is in the form of loans, substantially increasing the number of college graduates faced with the burden of repaying enormous student loan debt upon entering the workforce.

Concerned by the mounting financial strain placed on young professionals, states began to develop innovative programs designed to help families and students save for their college education. The original plans were created by states such as Florida, Michigan, Ohio and Wyoming in the late 1980's. Since that time, over eleven million families have saved more than $200 billion in what are commonly referred to as Section 529 Plans. Additionally, more than one million students nationwide have used these programs to help pay for their college education.

Although states created Section 529 plans more than twenty years ago to encourage their citizens to save for college, the movement started to gain momentum in 1994 with Michigan's victory in the Sixth Circuit Court of Appeals. As a result of that court decision, the Michigan Education Trust Prepaid Tuition Plan was declared to be Tax-exempt as an instrumentality of the state.

Children in Classroom

Following the court decision, the Internal Revenue Service declared its intention to contest the tax status of each plan on a case-by-case basis, which prompted the states to increase their efforts in Congress to secure federal tax advantages to promote college savings. In 1996, U.S. Senator Bob Graham of Florida, where a prepaid plan was well established, and U.S. Senator Mitch McConnell of Kentucky, which had a savings trust, led a bipartisan effort to provide federal tax relief for all plans, resulting in the creation of Section 529 of the Internal Revenue Code (IRC).

The development of IRC Section 529 and the resulting federal tax benefits (tax deferred treatment of the earnings when used for higher education) spurred the development of college-savings plans nationwide. From 1996 to 2000, 30 states developed and launched a Section 529 plan, dramatically increasing the opportunities for families to begin to save for the rising costs of higher education.

The enactment of the Economic Growth and Tax Relief Reconciliation Act on June 7, 2001, provided further congressional support for Section 529 plan. The 2001 tax act completely exempted the earnings of Section 529 plans from federal taxation, further solidifying the partnership between the federal government and the states in the promotion of college savings, rather than having families rely on loans for their children's education.

In their work to promote saving for college, states have provided leadership and innovation to improve educational and economic opportunities for all Americans. Coming in an era of concern over corporate governance activities and increased governmental regulations in the markets, Section 529 plans are a shining example of what can be achieved by a public / private partnership administered through a state mandate.

In general, the states have structured investment options in Section 529 plans to the benefit of participants who are not experienced investors. For example, most savings plans offer age-based investment options that automatically re-balance assets based on the age of the beneficiary, making it very easy for families to save. Additionally, the states' role in selecting financial firms or investment managers through competitive procurement assures participants that they receive better pricing and account servicing than they could obtain independently.

Today, 49 states and the District of Columbia offer Section 529 plans to their residents. The role of the states is even more vital as new investment options and program enhancements are being developed. States continue to provide quality assurance and an added level of fiscal oversight and control, ensuring that any new option or enhancement truly is beneficial to the families trying to save and adhering to the public policy goals established by the state.

Section 529 plans have been successful in motivating parents to invest and save for a child's higher education expenses. For millions of American children, the prospect of a brighter future has been made a reality through the efforts of states and financial service firms who have developed these unique partnerships.

Learn more about CSPN.

 

CSPN Webinar - Adding Performance Data to the website

 

529 plans can be used to pay for tuition, room and board, fees, books, supplies, and equipment required for enrollment. View All

CSPN is an affiliate of the

Affiliate of the National Association of State Treasurers