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529 E-ditorials

00-5: What's Al Proposing?
Joe Hurley
Thursday, February 10th 2000

There are so many education proposals floating around in this election year that we don't try to keep up with them all. Al Gore's ""National Tuition Savings Program"" has caught our attention, however, because it proposes a kind of national super-prepaid tuition plan. He came with some details of the plan this week while stumping in Michigan.

The part of his plan that we really like is the permanent tax exemption of earnings in a 529 plan account as long as the distributions are used for college costs. Tax exemption rather than mere tax deferral. It's actually not a new idea, as bills containing this provision were passed by Congress (and vetoed by Pres. Clinton) in both 1998 and 1999.

The part of the plan that is new is the creation of a federal prepaid tuition plan layered on top of existing Section 529 prepaid plans. The federal program would promise that you could use your state prepaid contract to pay for a guaranteed level of tuition at any ""participating institution"" in the country. You wouldn't have to worry about losing benefits if you have purchased a prepaid contract in one state and your kid ended up going to an out-of-state college. At least that's the idea, and it has a certain amount of appeal because it would mean that prepaid tuition contracts will be totally portable.

The problem with the proposal is that it just doesn't seem workable, at least the way we understand it. If every state prepaid program were the same, maybe something like this could be put in place. But the state 529 plans are not the same. In fact, there is such a variety of 529 plan features and peculiarities that we doubt very much that a federal program could be designed to fit them all without being horrendously complicated or overly restrictive.

The other problem with Gore's proposal is that it fails to recognize that we already have completely portable college savings options with the Section 529 savings plans that are now available through so many states. In fact, the CollegeSure CD available under the Montana and Arizona plans offers portable tuition inflation protection, except that it does it much more efficiently than the federal government could. And who is going to be willing to pay the ""portability premium"" that the federal program would charge to participants? Probably only those people who will see the loopholes and figure out a way to exploit them.

It's a nice thought, Mr. VP. But we think the states are better left alone to do the tuition thing themselves. Toss the federal tuition insurance (but keep the part about making 529 plan earnings exempt).

» 05-4: The 529 marshals have arrived - 08/30/05
» Our 5.29th-year anniversary - 06/29/05
» 05-2: 529s and the new Bankruptcy Act - 04/28/05
» 05-1: Reform or Deform? - 02/27/05
» 04-6: Perspectives on the 529 debate - 12/28/04
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