Not much is known about the reasons why some parents do not save for college. But, one possibility is that nobody is periodically telling them about the need to save for college.
Birthing classes do not discuss the importance of giving the gift of college. When a baby is born, most hospitals do not tell the newborn’s parents about the need to save for college. Preschools do not provide parents with brochures about college savings plans. Elementary and secondary school teachers do not sign up parents for 529 plans during parent-teacher conferences.
In contrast, whenever parents switch jobs, the human resources staff encourage them to sign up for the company’s retirement plans. Some companies automatically enroll employees in retirement plans, using an opt-out process instead of an opt-in process. More than half of employers who offer retirement plans match employee contributions to their retirement plans, providing them with an incentive to increase their retirement plan contributions.
Thus, parents are more likely to be reminded of the need to save for retirement than the need to save for their children’s college education.
This yields much greater participation in retirement plans than in college savings plans.
- According to the 2018 Bureau of Labor Statistics (BLS) National Compensation Survey, 55% of all 137 million civilian workers, including workers in private industry and state and local governments, participate in a workplace retirement plan. Workplace retirement plans include 401(k), 403(b), ESOP and pension plans. These retirement plan participants represent 78% of the 71% who have access to a workplace retirement plan.
- Only 18% of children under age 18 have 529 college savings plans.
The solution is obvious: employer-sponsored 529 college savings plans. If employers can make tax-free contributions to 529 plans for their employees’ children, employers will remind employees about the need to save for college. This idea can also solve the student loan debt problem, since every dollar saved is a dollar less borrowed.
To facilitate this, Congress should amend the definition of educational assistance in 26 USC 127(c)(1) to include employer contributions to employee-owned 529 college savings plans. This would exclude up to $5,250 in employer-paid contributions to employee-owned 529 plans from the employee’s income.
More than just the tax-free contributions to college savings plans, such a change in the rules concerning employer-paid educational assistance would give employers a reason to remind their employees about the need to save for college.