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02-1: Taking the S out of QSTP
Monday, February 4th 2002
In case you haven't noticed, there's an "S" missing from the formal acronym for a 529 plan. What used to be the qualified state tuition program (QSTP) is now the qualified tuition program (QTP).
The official explanation for the change sounds reasonable enough: Internal Revenue Code section 529 is no longer the exclusive domain of the states. Beginning this year, post-secondary institutions including private colleges may establish and maintain their own section 529 prepaid tuition programs as long as they meet certain conditions. (We generally support this development, as it may provide an attractive option for families targeting certain private colleges.)
But perhaps the removal of the S portends a bigger issue--one we should all be concerned about. What would happen if the states really lost their grip on 529 plans? I raise this as an issue not because of the entry of private colleges, but because of the increasing role of the private sector in managing and marketing these programs. When I look at the 529 landscape these days, I see less of the states and more of the mutual fund industry. Just locating the name of the sponsoring state can be difficult with some of the "national" 529 plans.
Many people would say "Hooray" to all this. After all, they may argue, who do you want handling your investments? A state agency? Or an investment company with the proven resources, experience and expertise in managing money? Outsourcing has produced other benefits as well. The fact that 529 plans with their private sector vendors are now competing so vigorously for our college savings has helped to bring about improved programs, better education and planning tools, more thorough disclosures, and greater investment choice (but not necessarily lower costs).
Please remember, however, that we still need the states. The reason is pretty simple: our federal government trusts the states. Because of this trust it is willing to go along with the states' desires to help every college-bound family--no matter what their income level, age of the future student, or college savings goals. Not only has Congress allowed the states to carry the ball, they have now added federal income tax exemption to boot.
To really appreciate the states, consider what a college savings program designed by the federal government would look like. It would have age restrictions, income limitations, a low annual contribution cap, and strict qualification rules. (In fact, we already have this program. It's the old Education IRA, now called the Coverdell education savings account.)
Few people would deny that 529 plans have had a fairy-tale existence (one IRS official labeled it "Alice in Wonderland"). Unfortunately, the Golden Goose of 529 may be killed (or at least plucked) if Congress ever becomes convinced that states have given away their programs to the private sector. Restriction of federal tax benefits, new limitations, and increased complexity would be the likely result.
The best defense against federalization is for the states to stay close to their 529 plans. Don't get me wrong here. I'm not advocating that the states fire their vendors and go back to handling the investments and maintaining the accounts. What I am suggesting is that state officials stay interested, state agencies remain vigilant, and state support continues for incentives and innovative programs that connect their 529 plans to the goal of getting their citizens through college.
Several of the states are shining examples of how this can be done. In addition to direct financial support for program participants (such as state tax deductions for contributions and preferential treatment in state financial aid formulas), we see states using their 529 plans to provide financial education to families, and in creating new scholarships for low-income students. In some cases, private companies have joined with the states to help make these education and scholarship initiatives even more successful.
The bottom line is that higher education is a good investment--for the student and for society in general. 529 plans are a good thing that might not be so good if Uncle Sam takes over. Let's hope the states can keep it together.
» 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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