Higher Education: A Small Percentage of Families Save in 529 Plans
Released: 2012-12-12T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Paying for college is becoming more challenging, partly because of rising tuition rates. A college savings plan can be an option to help meet these costs. To encourage families to save for college, earnings from 529 plans--named after section 529 of the Internal Revenue Code--grow tax-deferred and are exempt from federal income tax when they are used for qualified higher education expenses. In fiscal year 2011, the Department of the Treasury estimated these plans represented $1.6 billion in forgone federal revenue. Managed by states, over one hundred 529 plan options were available to families nationwide as of July 2012. The number of 529 plan accounts and the amount invested in them has grown during the past decade. GAO was asked to describe (1) the percentage and characteristics of families enrolling in 529 plans, (2) plan features and other factors that affect participation in 529 plans, and (3) the extent to which savings in 529 plans affect financial aid awards. GAO analyzed government data, including the SCF. This survey's 529 plan data are combined with Coverdells, so the SCF estimates used in the report include both 529 and Coverdell data. GAO also analyzed National Postsecondary Student Aid Study data; conducted interviews with federal and state officials, industry and academic experts, and state and institutional higher education officials; reviewed 529 plan and Department of Education documents; conducted a literature review; and reviewed relevant federal laws, regulations, and guidance.

section_title: What GAO Found
paragraphs: A small percentage of U.S. families saved in 529 plans in 2010, and those who did tended to be wealthier than others. According to the Survey of Consumer Finances (SCF), less than 3 percent of families saved in a 529 plan or Coverdell Education Savings Account (Coverdell)--a similar but less often used college savings vehicle also included in the SCF. While the economic downturn may have reduced income available for education savings, even among those families who considered saving for education a priority, fewer than 1 in 10 had a 529 plan (or Coverdell). Families with these accounts had about 25 times the median financial assets of those without. They also had about 3 times the median income and the percentage who had college degrees was about twice as high as for families without 529 plans (or Coverdells).

States offer consumers a variety of 529 plan features that, along with several other factors, can affect participation. Some of the most important features families consider when choosing a 529 plan are tax benefits, fees, and investment options, according to experts and state officials GAO interviewed. These features can vary across the state plans. For example, in July 2012, total annual asset-based fees ranged from 0 to 2.78 percent depending on the type of plan. 529 plan officials and experts GAO interviewed said participation is also affected by families' ability to save, their awareness of 529 plans as a savings option, and the difficulty in choosing a plan given the amount of variation between plans. Selected states, however, have taken steps to address these barriers. For example, to address families' ability to save, particularly for low-income families, some states have adopted plans that include less risky investments, have low minimum contributions, and match families' contributions.

Savings in 529 plans affect financial aid similarly to a family's other assets. For federal aid, a family's assets affect how much it is expected to contribute to the cost of college. If the amount of those assets exceeds a certain threshold, then a percentage is expected to be used for college costs. For example, for students who are dependent on their parents, the percentage of parental assets, including savings in 529 plans, that the family may be expected to contribute ranges from 2.64 to 5.64 percent. Many states and selected institutions also treat 529 plan savings the same as other family assets. However, a few states provide them with special treatment, such as exempting those funds from their financial aid calculation.

section_title: What GAO Recommends
paragraphs: GAO is not making any recommendations in this report.

section_title: Letter
paragraphs: While median family income decreased between 2005 and 2011, college  tuition and fees increased at an average annual rate of 6 percent, more  than double the rate of inflation. As families look for ways to prepare for  these rising costs, their options include saving in advance; paying for  expenses at the time they occur out-of-pocket and/or through grants and  scholarships; or financing the cost through educational loans that they  repay at a later date. Loans have become an increasingly popular option  to cover these costs. However, with college loan balances now  estimated at $914 billion, more than total credit card debt, financing a  large portion of college costs potentially creates a future financial burden  for students and their families. To encourage people to save for college  expenses in advance, Congress, in 1996, added section 529 to the  Internal Revenue Code, which authorized state qualified tuition programs,  otherwise known as 529 plans. These plans are available in two forms— prepaid tuition plans and college savings plans. In prepaid tuition plans,  participants buy tuition credits or certificates on behalf of a designated  beneficiary, who can use them for qualified higher education expenses.  College savings plans allow for contributions to an account for the  purpose of paying a designated beneficiary’s qualified higher education  expenses. As of July 2012, more than one hundred 529 plan options have  been developed and are managed by states and the District of Columbia.  In 2011, there were more than 11 million accounts with assets of $167  billion (in 2012 dollars).

While there is no federal tax deduction for payments or contributions to  529 plans, which are made with after-tax dollars, plan earnings  accumulate tax-deferred and earnings included in withdrawals used to  pay for qualified higher education expenses are not taxed. This tax  expenditure cost the federal government an estimated $1.6 billion in  forgone revenue in fiscal year 2011. We reported, in 2012, that higher income households are more likely to have 529 plans and tend to benefit  more from these tax preferences because of their higher marginal tax  rate. We have recommended in the past that tax expenditures be  periodically reviewed to determine their effectiveness in achieving specific  policy goals, particularly given the nation’s long-term fiscal imbalance.

In response to your request to examine the extent to which 529 plans  help families of all income levels save for college and how these plans  affect student financial aid, we reviewed (1) the percentage and  characteristics of families enrolling in 529 plans, (2) the plan features and  other factors that affect participation in 529 plans, and (3) the extent to  which savings in 529 plans affect financial aid awards.

To answer these research objectives, we analyzed government and  industry data; conducted interviews with federal and state officials,  industry representatives and academic experts, as well as state and  institutional higher education officials; reviewed 529 plan and Department  of Education (Education) documents; conducted a literature review; and  reviewed relevant federal laws, regulations, and guidance. We assessed  the reliability of the data we used by reviewing documentation,  interviewing knowledgeable officials, and conducting electronic testing on  relevant data fields. We found the data we reviewed reliable for the  purposes of our analyses.

To determine the percentage and characteristics of families enrolling in  529 plans, we reviewed data from the 2010 Survey of Consumer  Finances (SCF); the 2007-2008 National Postsecondary Student Aid  Study (NPSAS), which was the most recent available and which we  adjusted to 2010 dollars; and 2007-2010 Statistics of Income (SOI)  federal tax data. Our analysis of data from SCF, NPSAS, and SOI are  subject to sampling errors because these data sets are based on  samples. Unless otherwise noted, all percentage estimates based on  SCF, NPSAS, and SOI have 95 percent confidence intervals that are  within 5 percentage points of the estimate itself, and all numerical  estimates other than percentages have 95 percent confidence intervals  that are within 5 percent of the estimate itself. Using SCF data, we  generated estimates of the characteristics of households—including  wealth (financial assets), income, education, and race/ethnicity—enrolled   and  in 529 plans or Coverdell Education Savings Accounts (Coverdells)compared those to characteristics of families not enrolled in these plans.  Our estimates are based on analyses from the restricted SCF dataset and  were conducted with assistance from officials at the Board of Governors  of the Federal Reserve System (Federal Reserve). We also developed a  profile of the general college population using NPSAS data. In addition,  we analyzed taxpayer data from SOI and used a microsimulation model  from the National Bureau of Economic Research to understand the extent  to which taxpayers use withdrawals (known as distributions) from 529  plans for qualified educational expenses and how the tax savings from  these plans are distributed across income levels.

To understand the features and factors that affect participation, we  interviewed officials from five state 529 plans (Louisiana, Michigan,  Pennsylvania, Utah, and Virginia), conducted a literature review, and  spoke with academic researchers, industry regulators, financial services  companies, financial experts, and consumer interest groups. While we  selected the five state plans to represent variety in the types of plans  offered, benefits, and geographic location, our findings cannot be  generalized to all 529 plans. We also analyzed College Savings Plan  Network (CSPN) data to provide a national overview of plan features and  benefits. receive financial aid and the median award amount, we analyzed NPSAS  data. To assess efforts by states to disclose 529 plan information to  consumers, we reviewed disclosure documents from selected states as  well as CSPN disclosure principles.

CSPN is an affiliate to the National Association of State Treasurers and serves as a  clearinghouse for information on 529 plans. Plan data are as of July 2012.

We assessed the extent to which savings in 529 plans affect federal  financial aid awards by reviewing relevant federal laws, regulations, and  guidance, and interviewing Education officials. In addition, we analyzed  NPSAS data to determine the extent to which a family’s total assets  affected the federal expected family contribution to college expenses. To  understand how savings in 529 plans affect state and institutional  financial aid, we interviewed six state financial aid offices and six  institutions of higher education. We selected states that indicated on a  National Association of State Student Grant and Aid Programs survey  that they used a financial aid formula other than the federal methodology  in their primary needs analysis and/or provided special treatment for state  529 plans. We selected an institution in each of the six states that was  reported as using the College Board’s PROFILE or another institutional  form, in addition to the Free Application for Federal Student Aid, to gather  information used in making decisions regarding institutional financial  aid. To obtain an institutional perspective beyond the six schools, we  interviewed officials from national organizations representing community  colleges, private nonprofit and public colleges and universities, and for- profit schools. A more detailed explanation of our methodology is  available in appendix I.

We conducted this performance audit from November 2011 to December  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: History of 529 Plans
paragraphs: 529 plans are a college savings vehicle that originated in the states. In  1986, Michigan created the Michigan Education Trust to operate what is  generally considered the first state prepaid tuition plan. In 1996, Congress  enacted Section 529 of the Internal Revenue Code, setting out  requirements that state 529 plans must meet to be exempt from federal  tax. The Economic Growth and Tax Relief Reconciliation Act of 2001  included a provision making earnings included in distributions from 529  plan accounts entirely tax-exempt as long as they are used to pay for  qualified higher education expenses. For other key legislative actions  and the value of assets invested in these plans, see fig. 1.

The number of 529 plan accounts has also increased since the plans  were granted expanded federal tax advantages in 2001 (see fig. 2).  529 plans are a state-sponsored investment or savings vehicle whose  purpose is to encourage people to save for college. Contributions to 529  plans are made with after-tax dollars and are not deductible for federal tax  purposes. Annual contributions in excess of $13,000 are generally subject  to federal gift taxes.necessary to provide for the qualified education expenses of the   Total contributions may not exceed the amount  beneficiary, which is determined by each state; however, individuals may  open 529 plan accounts in multiple states. Earnings on contributions  grow tax-deferred. When a distribution is made from a 529 plan, the  earnings portion is tax-exempt as long as it is used to pay for qualified  education expenses. Taxpayers must report to the Internal Revenue  Service (IRS) whether the distribution was for qualified higher education  expenses. Distributions not used for qualified higher education expenses  can be made to either the account owner or beneficiary, but the portion of  the nonqualified distribution consisting of investment earnings is taxable  and subject to an additional 10 percent penalty. The federal penalty  does not apply in some circumstances, for example if the distribution was  considered nonqualified because the beneficiary died or received a  scholarship.

While section 529 provides that account owners and beneficiaries may  not directly or indirectly control how contributions or earnings are  invested, in 2001, IRS issued a notice setting out a rule permitting a  change in investment strategy once per year and upon a change in the  designated beneficiary of the account. For 2009 only, this was  increased to twice per year.

There are few federal restrictions on 529 plan participation. For example,  there are no income limits and almost anyone can initially be named as a  beneficiary—an individual may open a 529 plan account for a child,  grandchild, friend, spouse, or for themselves. Further, the 529 plan  account owner may change the beneficiary at any time, though the  subsequent beneficiary must be a member of the family of the original  beneficiary in order for this change to be tax-exempt.

section_title: 529 Plan Operation and Features
paragraphs: Because 529 plans are state-sponsored investments, states determine  whether and what type of plans to offer (i.e., prepaid tuition or savings) as  well as the eligibility criteria (for example, at the time of application  prepaid tuition plans may require either the account owner or beneficiary  to be a resident of the state administering the plan whereas residents and  nonresidents can invest in most states’ college savings plans);  administrative and investment fees; and associated state tax benefits.  Almost all states offer a college savings plan. In these plans, individuals  purchase interests or shares in a trust established by the state. In most  cases, the trust assets are invested in mutual funds. The shares in  college savings plans can be sold directly by the state or through an  external program manager hired by the state (direct-sold) as well as  through a financial advisor or broker (advisor-sold). College savings plans  may offer a number of investment options, which often include stock  mutual funds, bond mutual funds, and money market funds. These  investment options can vary in terms of risk and return, ranging, for  example, from investments that are insured by the Federal Deposit  Insurance Corporation (FDIC) to options that are almost completely  invested in aggressive-growth funds. Many plans offer age-based  portfolios that shift automatically into more conservative investments as  the beneficiary approaches college age. Fifteen states also offer prepaid   To help run their plans, states may  tuition plans to their state residents.employ marketing staff, advisors, financial consultants, or other experts.

Some states offer a variety of tax advantages that can include a state  deduction or non-refundable credit for plan contributions and tax-deferred  earnings. These benefits may apply only to residents who make  contributions to their own state’s plan or, in a few states, may include  contributions made to other states’ plans.

section_title: Plan Disclosures
paragraphs: Although most 529 college savings plans have been modeled after  mutual funds, 529 plans are regulated differently than mutual funds under  the federal securities laws because they are regulated as municipal  securities. As municipal securities, 529 plans are exempt from the  registration and reporting requirements of the federal securities laws.  However, broker-dealers selling 529 plans (advisor-sold plans) must  comply with the rules of the Municipal Securities Rulemaking Board  (MSRB). Specifically, MSRB requires broker-dealers who sell 529 plans  to follow certain guidelines, such as having reasonable grounds to believe  that the recommended product is suitable for the customer; disclosing  certain information, such as plan fees and state tax implications; following  certain requirements when advertising; and posting disclosure documents  on its Electronic Municipal Market Access Website. However, MSRB  rules do not apply to state issuers when they market their 529 plans  directly to the investor without the assistance of a broker-dealer (direct- sold plans). In 2004, in response to concerns that 529 plan disclosures  were inadequate, CSPN, after working with the Securities and Exchange  Commission, the MSRB, and the National Association of Securities  Dealers, developed voluntary disclosure principles to be adopted by state  issuers on plan performance, fees, and state tax information, among  other things. These principles were designed to enhance investors’ ability  to compare information across plans. Since 2004, the principles have  been updated several times with the most recent update in May 2011.

section_title: Student Financial Aid
paragraphs: As authorized under Title IV of the Higher Education Act of 1965, as  amended, the Department of Education provides assistance to help  millions of students and families meet the costs of higher education  through grants, work-study, and loans. A substantial portion of this federal  financial aid is awarded based on the amount of a student’s financial  need, which is generally the difference between a student’s cost of  attendance and an estimate of his family’s ability to pay these costs,  known as the expected family contribution (EFC). In addition to the  student’s income and assets, parents’ income and assets are also used  to determine the student’s EFC unless the student is classified as  independent. Independent students have their income and assets  included in the EFC and their spouses’ income and assets, if applicable.  Several criteria are used to determine if a student is independent, such as  the student’s age, and if he or she is married or separated, enrolled in a  master’s or doctoral degree program, or serving on active duty in the  military, among other things.

To apply for federal financial aid, students and, in the case of dependent  students, parents submit information on income, assets, and the number  of children enrolled in college through the Free Application for Federal  Student Aid (FAFSA). This information is then used to determine the  student’s eligibility for federal student aid by calculating the EFC through  a process known as federal methodology, which is set out in statute. In  terms of assets, figure 3 shows the information required by the FAFSA  regarding the net worth of students’ and parents’ investments, which  includes savings in 529 plans along with other investments such as  Coverdells, money market funds, stocks, and mutual funds (for a full copy  of the FAFSA see app. II).

States and institutions may also offer financial aid. To determine the  amount of such aid, some states and institutions choose to gather  information in addition to what is required by the FAFSA. One form used  by some institutions is the College Board’s PROFILE form. The PROFILE  asks for information not included on the FAFSA, such as home equity and  medical expenses, as well as more detail about information that is  included on the FAFSA. The institutions may then use an individualized  institutional methodology to determine the student’s EFC for institutional  financial aid.

section_title: Few Families Have 529 Plans and Those Who Do Tend to Be Wealthier
subsections: section_title: A Small Percentage of Families Have 529 Plans
paragraphs: According to the 2010 Survey of Consumer Finances (SCF), less than 3  percent of U.S. families had 529 plans or Coverdells, a similar but less  often used education savings account. Even among families who  acknowledged upcoming education expenses, 529 plans were not widely  used. Of the approximately 25 percent of families who said they expected  major education expenses in 5-10 years, about 7 percent of them had  529 plans or Coverdells. Similarly, of the approximately 18 percent of  families who reported saving for education was a priority, only about 9  percent had 529 plans or Coverdells. 529 plans are also less commonly  used than other savings vehicles among those saving for college. For  example, a 2010 Sallie Mae survey found that most parents saved for  college in general savings accounts or certificates of deposit and, of those  who did invest, more used general investment vehicles than 529 plans.  Based on our analysis of SCF data, the median amount in 529 plan or  Coverdell accounts was about $14,700.

section_title: Families with 529 Plans Generally Have More Wealth and Education than Those without 529 Plans
paragraphs: Families with 529 plans or Coverdells typically had much more wealth  than families without these accounts, according to our analysis of SCF  data. Based on our analysis of the 2010 SCF, we estimate that the  median financial asset value for families with 529 plans or Coverdells  was about $413,500, which is about twenty-five times the median  financial asset value for families without 529 plans or Coverdells (about  $15,400).retirement assets than other families. Of families with 529 plans or   For example, families with 529 plans or Coverdells had more  Coverdells, about 94 percent had retirement assets, such as those in  401(k) accounts or traditional pensions. In contrast, approximately 49  percent of families without 529 plans or Coverdells had these retirement  assets. Further, the median value of retirement assets was much greater  for those with 529 plans or Coverdells. Specifically, the median value in  retirement accounts was about $213,600 for families with 529 plans or  Coverdells, while the median value for families without 529 plans or  Coverdells was about $40,300. A larger share of families with 529 plans  or Coverdells (27 percent) also believed they will have more than enough  retirement income from pensions and Social Security to maintain current  living standards than the share of families without 529 plans or Coverdells (16 percent), which may put them in a better position to save for college.

In 2012, we reported similar findings using data from the 2007 SCF. GAO-12-560.

section_title: States’ 529 Plan Features and Other Factors Can Affect Participation
subsections: section_title: Tax Benefits, Fees, and Investment Options Vary Across State 529 Plans
paragraphs: Officials in every state and most experts and representatives we  interviewed identified tax benefits, fees, and investment options as some  of the most important features consumers consider when choosing  whether or not to participate in a 529 plan and, if so, which plan to  choose. These features vary by state and plan. All states offer at least  one plan and many offer a combination of college savings (either direct- sold, advisor-sold, or both) and prepaid plans. For example, 14 states  offer a direct-sold plan only, 22 states offer both direct-sold and advisor- sold plans, and 6 states offer all three plan types: direct-sold, advisor- sold, and prepaid. The popularity of direct-sold college savings plans has  grown over time and in 2011 total assets were essentially evenly split  between those and advisor-sold plans.

States offer a range of tax benefits for 529 plans, and these benefits are a  primary incentive to investing in a 529 plan, according to many state  officials we interviewed. In addition to earnings growing tax-deferred, our  analysis of CSPN data shows the majority of states with an income tax  offer some form of benefits: 33 offer a tax deduction and 3 offer a  nonrefundable tax credit to residents who participate in their state’s   Five states also extend benefits to residents who participate in any  plan. state’s plan. Almost all states limit tax benefits to the account owners, but  one state extends those benefits to grandparents, aunts, and uncles who  contribute to the plan. Officials in some states we interviewed said they  provide additional tax benefits, for example, one state offers an  exemption from the state inheritance tax. Others allow contribution  amounts that exceed the annual deduction limit to be carried over to the  following year’s return.

Various fees and expenses may be associated with 529 plans, including  administrative and investment fees. Administrative fees, which are  charged by the state and/or the program manager hired by the state,  cover administration of the 529 program, including customer service and  marketing. Investment fees are charged by the investment company to  manage the funds. The aggregate of these administrative and investment  fees is often referred to as “annual asset-based fees,” which are  expressed as a percentage of the fund’s average net assets. In addition,  advisor-sold plans may also charge a “sales load”—that is, a fee paid to  the selling broker when the fund is purchased or redeemed—and direct- sold and advisor-sold plans may also charge participants additional fees  for services such as enrolling or changing the account owner.

Fees among 529 plans vary widely; total annual asset-based fees among  plans nationwide ranged from 0 percent to 1.97 percent for direct-sold  plans and 0 percent to 2.78 percent for advisor-sold plans, as of July  2012. As seen in table 2, there is variation among states in both  administrative and investment fees. Such variation occurred even among  states with similar administrative structures. For example, among three of  the states we reviewed where most administrative functions were  conducted in-house, one state charged administrative fees of between  0.44 percent and 0.46 percent of the balance annually, another charged  between 0.15 percent and 0.20 percent, and a third charged no  administrative fees, instead covering operational costs and salaries  through an annual state appropriation. Investment fees also varied: for  example, underlying mutual fund fees ranged from 0 percent to 1.82  percent of the balance annually, depending on the type of investment  option a participant chooses. For advisor-sold funds, sales loads also  varied, ranging from 0 percent to 5.75 percent, in part based on the fund  class. In addition, among the five states we reviewed, four did not  charge an enrollment or application fee, while one charged $25, although  the fee may be waived through promotions to encourage participation.  529 plan fees remain higher than fees for similar mutual funds an investor  might purchase outside of a 529 plan. According to a 2011 study by  Morningstar, 529 plan mutual funds charged, on average, an additional  0.31 percent of the account balance annually in investment fees  compared with their respective mutual fund categories in the open  market. The administrative fees charged by most 529 funds raise the  cost even higher. However, Morningstar does note that fees for 529 plans  have declined in recent years and officials at the majority of state plans  we interviewed told us they have taken steps to reduce fees – for  example, by renegotiating program manager contracts, using competitive  bidding for program management, or consolidating functions in-house  rather than using a program manager. As we have previously reported,  fees are one of many factors participants should consider when investing  because even a small fee increase can significantly decrease savings  over time.

State plans offer a variety of investment options to 529 college savings  plan participants. Plans in the states we reviewed, for example, include  up to 17 different investment options, including age-based, static, and  customized portfolios, to cater to participants’ various levels of risk  tolerance and investment sophistication. Age-based options were  generally the most popular and, according to state officials we  interviewed, may appeal to investors who might have more limited  investment experience or a lower risk tolerance. One state plan we  reviewed also offers a customized option for participants who seek more  control over their investments, which allows them to designate their own  allocations in funds such as stocks and bonds. For more risk-averse  participants, some states also offer a FDIC-insured investment option or  one that in some other way guarantees the investment’s principal. To  help investors determine which plan best meets their needs, officials we  interviewed in two states said their states provide risk assessment  information through customer call centers. One state developed a risk  tolerance questionnaire to explain investment scenarios, while the other  had a representative ask informal questions to help potential investors  assess their own risk level.

Families can also choose to invest in prepaid plans, which were offered in  three of the five states we reviewed. These plans also vary in fees,  payment options, and cost. Two plans, for example, charged an annual  administrative fee of just under 0.50 percent and the third charged no  annual fee. In terms of payment options and costs, two states we  interviewed offered prepaid plans by academic periods or units that can  be used to pay for future tuition costs with the option of paying in lump  sum or through a monthly payment program. According to state officials,  the cost of these prepaid plans is generally determined by forecasting  future tuition and fees at different types of schools (4-year, community  college, etc.), given a number of actuarial assumptions on tuition inflation  and anticipated investment return. One state, for example, offered a  contract to cover four years of college costs for a child currently under  age five at a lump sum of $56,600 and another state offered a similar  contract for just under $66,500. A third state we reviewed does not offer  units or contracts, but allows participants to contribute any amount to the  plan. When the participant withdraws the funds for qualified educational  expenses, they will receive the amount they contributed adjusted by a  tuition inflation value.

section_title: Participation is Affected by Ability to Save and Other Factors, but Some States Have Adopted Strategies to Address Barriers
paragraphs: Families encounter a number of barriers as they consider saving for  college: they may struggle with making saving a priority, and for those  who do plan to save, many do not know 529 plans exist as a savings  option. Additionally, once families decide to invest in a 529 plan they may  have trouble understanding how it works and the variation across plans  may affect their ability to select one that best meets their needs (see   fig. 5).

Families may encounter a variety of barriers saving for college, such as  insufficient income, underestimating the cost of college, and  misconceptions about financial aid availability, but selected states are  taking steps to help address these barriers. A 2010 national survey  published by Sallie Mae found that while nearly nine out of ten parents  expected their child would attend some form of higher education, only  three out of five parents of college-bound children have saved or invested  for their oldest child’s education.

First, many families may not save because they lack adequate income or  have competing financial priorities. The same Sallie Mae survey reported  that 68 percent of those who are not saving cited a lack of money as a  major reason.this as a challenge: for example, one state official said that the economic  downturn has affected some families who are reluctant to make deposits  or participate in a 529 plan because they may need to choose between  paying their mortgage and saving for college. In terms of competing  priorities, two industry representatives we interviewed stressed that  retirement should be a higher priority than saving for college. Officials  from one state added when a family’s budget shrinks or the economy is  uncertain, families reduce college rather than retirement savings.  Furthermore, a few industry representatives said families should consider  using other tax-deferred savings vehicles where funds could be used for  multiple purposes, such as retirement and education. The states we  selected to review have adopted strategies to expand participation among  lower income families who may have limited resources to allocate  towards savings, including offering matching programs, low minimum  initial contributions, and less risky investment options.

For example, in 2011 a family of 4 earning less than $44,700 would qualify, according  to plan documentation. dollar for dollar, up to $400 annually per beneficiary for up to 4  years. In addition to increasing participation, officials from one  state plan noted that the matching program can also help  minimize student loans and reduce the amount students will have  to work while in school. An ongoing experiment conducted by the  Center for Social Development also found a positive impact on the  number of 529 plan accounts for families who were automatically  enrolled in a state-owned 529 account with a matching program in  one state. In addition to participating in the automatically opened  account, families in the treatment group were offered an additional  $100 to open a private account. These families opened private  529 accounts at a higher rate (17 percent of families with a match  compared to 2 percent of those in the control group without the  incentives), and deposited more into those accounts. While  matching programs may have positive results, two states we  reviewed reported challenges with funding and awareness. One  state’s program had not been authorized since 2008 and officials  in another state said their enrollment remained low despite being  open to all participants because the state’s 529 marketing budget  was eliminated.

Low or No Minimum Initial Contributions: Low or no minimum  initial contributions and fee waivers may also help increase  participation among low-income families, according to state  officials and others we interviewed. Nationally, minimum initial  contributions range from $10 to $5,000, according to our analysis  of CSPN data; however, the majority of states require an initial  contribution of $25 or less. Two states allow participants to open  an account with any amount. Officials in one state reported that  keeping the initial deposit amounts low can also help facilitate one  of their main goals: to help spur the mental commitment and habit  to save.

Less Risky Investment Options: Officials from many states we  reviewed said they offer investment options that pose less risk to  the investor, which can appeal to low- to moderate-income  families. One state, for example, partnered with two local banks to  provide a FDIC-insured option to target families who might  otherwise save in the bank’s savings account. According to an  official from the plan’s banking partner, clients with more assets  often use financial planners and are aware of 529 plans, while the  FDIC-insured option was designed for those without financial  planners and who use the bank’s more traditional products.

According to state officials, most of the states we reviewed are not  tracking participant’s demographic information such as income, however,  making the success of these efforts for low-income families difficult to  assess.

Second, in addition to insufficient income, some families may not save  because they procrastinate or underestimate the true cost of college,  according to officials from most of the states we reviewed. Some parents  may not budget money to save for college due to a lack of understanding  about what college really costs or they become overwhelmed and do  nothing, officials at one state 529 plan said. To address these challenges,  selected state 529 plans have adopted financial literacy programs and  marketing strategies emphasizing the importance of saving even a small  amount early and often. To target families with younger children, two  states provide materials to parents of newborns through the hospital or  direct mail and two states work with elementary schools to distribute  materials on the states’ 529 plans. Some states also establish  contribution deadlines linked to certain benefits, such as discounted  enrollment, or provide incentives to families who contribute during certain  times of the year. To prevent families from feeling overwhelmed about  college costs, one state has focused its marketing on saving a small  amount each month, $25, to help reduce the student’s future debt,  instead of focusing on the total cost of college.

Sallie Mae, August 2010. impact of a difficult economic climate, constraints on endowments, and  tighter budgets. In response, many of the states we reviewed have  attempted to address misconceptions about the financial aid process. For  example, one state lists common myths about 529 plans on its website,  explaining that approximately 60 percent of federal financial aid comes in  the form of loans, a debt the family must repay. The site encourages  families to save even in small amounts to offset the amount of debt the  family will incur.

For those who are saving for college, awareness that 529 plans exist as a  savings option is a challenge to participation, according to officials in most  of the states we reviewed. In addition, among parents who are saving for  college, one study found that almost half are unfamiliar with 529 plans. An  additional 4 percent volunteered that they had never heard of the plan or  did not know what it was. financial planners, according to many state officials we interviewed;  therefore, awareness may be a particular challenge for low-income  families who generally do not have access to such resources. Further,  some state officials and industry representatives we interviewed  encountered families with misperceptions about how 529 plans work,  such as not understanding they can invest in plans outside their home  state or use savings at any college or university. For example, officials  from two states reported families mistakenly believe prepaid plans can  only be used at an in-state institution.

Sallie Mae, August 2010. marketing and communication difficult, according to officials we  interviewed in two states. Marketing officials from one state told us  consumers requested more information on 529 plans, but it was difficult to  communicate information about the complex plans in a simple, consumer- friendly way. Officials in another state noted that plan complexity and a  lack of clear information can discourage families from researching and  enrolling in a plan.

Many state officials and some academic experts and industry  representatives reported that simplifying the information available to  consumers might keep families from feeling overwhelmed. Because  MSRB rules do not apply to state issuers when they market their direct- sold 529 plans, CSPN developed a set of disclosure principles to help  states provide consistent information. The voluntary principles contain  recommendations to help consumers understand plans and compare  various features, such as fees, tax issues, and risk. While disclosures  have been helpful, according to one expert who consults with a number of  states, there is room for improvement: disclosures could be more rigorous  in ensuring that consumers are informed of less-costly options within a  state if they exist and should cover information on prepaid plans, which is  currently not standardized. When comparing direct-sold disclosure  documents across states we reviewed, we found that the five states  generally adhered to the CSPN disclosure principles and contained  consistent information a consumer could compare. Three states,  however, were missing some information that could be helpful to  consumers, such as information on the risk of state tax law changes and  a statement that 529 plans should only be used to save for qualified  higher education expenses.

The structure of federal and state tax benefits, a primary incentive for  some 529 plan investors, can also affect participation as they may not be  as helpful to low-income families, according to some academic experts,  industry representatives, and state officials we interviewed. Low-income  families with low or no tax liability see less benefit from federal tax  benefits and may see no benefit from nonrefundable state tax credits  provided to 529 plan investors. According to a 2009 Treasury report,  families saving in 529 plans may need to carefully consider whether their  child will go to college because the penalty incurred if the funds are not  used for qualified education expenses may outweigh the tax benefits for  low-income families. In addition, Treasury noted most states do not  extend tax benefits to residents investing in out-of-state plans, limiting  competition. As a result, families have a strong incentive to choose their  home state plan even if other plans offer preferable investment choices.  In 2009, Treasury recommended states eliminate this “home-state bias”  to provide more investment options to consumers, more intense  competition between plans, and potentially lower fees. According to an  annual report from one state that extends its tax benefits to residents who  invest in other states’ plans, doing so, when other states do not, puts the  home state plan at a competitive disadvantage. State officials explained  that this policy results in other plans marketing their products in the state.  Residents, therefore, may be unaware of their home state plan’s benefits,  according to the report.

Finally, the fact that account holders may change their investment option  only one time per year may affect participation in 529 plans, according to  state officials and some industry representatives we interviewed. Officials  from one financial services company advocated removing any limits on  changing investment choices beyond those imposed by the financial  services company sponsoring the fund, as is the case with 401(k) plans  and individual retirement accounts. Another industry representative  observed some 529 plan participants changing their account beneficiary  solely because it would allow them to change their investment options.  However, the representative cautioned that participants should not  change their investment options too frequently; many experts advocate  that investors are best served by sticking with a long-term investment  plan.

section_title: Savings in 529 Plans Affect Financial Aid the Same as Other Assets
subsections: section_title: Savings in 529 Plans Are Treated Similarly to Other Assets That Are Included When Calculating the Expected Family Contribution
paragraphs: The extent to which savings in 529 plans, or other investments, affect  how much a family is expected to contribute to the cost of college—the  federal expected family contribution (EFC)—generally depends on the  family’s amount of assets. Education incorporates the amount of specific  types of assets into various calculations to determine the EFC.  However, in two calculations, families who meet certain criteria are either  not expected to contribute to the cost of college (automatic zero EFC) or  they qualify for a simplified calculation. In both cases, assets, including  savings in 529 plans, are not included in the calculation of the EFC.  According to the 2007-2008 NPSAS, about a quarter of families who filed  FAFSAs met these criteria.

In other calculations, assets, including savings in 529 plans, may affect  the EFC to different extents depending on whether students are  dependent on their parents or are independent with dependents of their  own. For dependent students, between 2.64 percent and 5.64 percent of  parental assets may be included in the EFC as described below:

First, the parents report the net worth (current value minus debt)  of their investments (see fig. 6 #1),contribution from assets is calculated, an amount known as the  “education savings and asset protection allowance” is subtracted   but before the total  (see fig. 6, #2). This allowance is designed to help protect a  portion of the parents’ assets.

Second, 12 percent of any parental asset amount that exceeds  the education savings and asset protection allowance is used to  determine the contribution from assets that will be considered in  the final EFC calculation (see fig. 6 #3).

Third, this contribution from assets is added to the parents’  available income to determine their adjusted available income  (see fig. 6, #4).

Fourth, a marginal rate, from 22 percent up to a maximum of 47  percent, is applied to the sum of the parents’ available income and  contributions from assets (known collectively as the adjusted  available income) to determine their EFC (see fig. 6, #5). As a  result, the amount of net parental assets, including savings in 529  plans, that can be included in the EFC ranges from 2.64 percent  to 5.64 percent.

section_title: Many States and Selected Institutions Also Treat 529 Plan Savings As Assets
subsections: section_title: States
paragraphs: Most state financial aid offices also consider savings in 529 plans as  assets. According to the 2009-2010 National Association of State  Student Grant and Aid Programs survey, 35 states reported that they  used the federal methodology for determining the EFC for state aid.  However, some states that reported using federal methodology for their  primary student needs analysis also indicated they provide special  treatment for state 529 college savings or prepaid plans when  determining student eligibility for aid. Specifically, seven states that used  federal methodology to award their state aid excluded the state’s 529  college savings plan and three excluded the state’s prepaid plan from  their calculation for state aid.

Of the officials in the six state financial aid offices we interviewed, none  said they considered assets to a greater extent than the FAFSA and a  few said their state took specific steps to exempt savings in these plans  from consideration. Specifically, officials in two states said there is  language in their 529 plan authorizing legislation that exempts plan  savings when determining a student’s eligibility for state financial aid.  Officials in another state said their state issued a regulation stating that  savings in a 529 plan would not affect state grant eligibility for residents  attending nonprofit higher education institutions. An official in a fourth  state said the legislature changed its higher education authorization  language so that students would still be eligible to receive a state  scholarship even if they enrolled in the state’s prepaid plan.

Institutional financial aid practices vary with regard to assets, but those  with more aid to award may gather additional information about a family’s  financial status, according to some representatives of national financial  aid organizations and institutional officials we interviewed.schools require students to provide information in addition to the FAFSA,  such as filling out the College Board’s PROFILE form or submitting tax  returns. One official said the PROFILE provides more detailed information  on a family’s assets, such as home equity and retirement account  balances, which helps the university prioritize the students with the most  need.

Institutional officials we interviewed said their schools considered savings  in 529 plans as assets, even if they used different methodologies to  calculate their financial aid or included the assets at different  percentages. Officials at two institutions said they did not consider  savings in 529 plans beyond how they are already reported by the family  on the FAFSA. An official at a third institution said the school does not  collect any additional information on savings in 529 plans beyond what is  requested on the FAFSA even though the school requires families to fill  out the PROFILE form and uses an institutional methodology to award its  financial aid. The remaining institutional officials said they collect  additional family financial information when calculating student aid, but  consider savings in 529 plans similarly to the family’s other assets.  Specifically, one institutional official said her school uses the PROFILE  form to gather more detailed information about a family’s financial  situation. Even so, 529 plan savings do not affect a student’s need any  differently than other assets, she said, which are assessed by the  institution at about five percent of their value. Additionally, she said 529  plan assets are considered parental assets even if they are reported as  student assets because the school assesses parental assets at a lower  percentage. An official at another institution said her school assesses  assets at around 20 percent of their value when calculating the EFC for  institutional aid.

Officials’ opinions varied on whether savings in 529 plans should affect  financial aid, but many said families’ concerns that these savings will  have an adverse effect are common. One state financial aid official said it  would be helpful if 529 plan savings were excluded entirely from the  calculation because including them can be a deterrent to saving. She said  her office often encounters families who feel penalized for saving  because they believe the students without savings receive financial aid.  Likewise, a 529 plan official said regardless of whether the student’s  financial aid will be reduced by savings in a 529 plan, there is the  perception that it will. In contrast, one institutional financial aid official said  savings in 529 plans should not be treated any differently than other  assets because the need analysis is meant to determine the family’s fair  share of college expenses and excluding 529 plans would be counter to  this aim. One researcher we interviewed found that the issue may be  most important for those families who are on the margin of receiving  federal financial aid. Regardless of the perceived effect 529 plan savings  may have on financial aid, some of the officials we interviewed said they  encourage families to save for college because much of the aid they may  be offered could be in the form of loans, so saving will generally be in the  student’s long-term financial interest.

section_title: Concluding Observations
paragraphs: As currently designed, 529 college savings plans benefit a small  percentage of U.S. families. In general these families tend to be wealthier  than others. It is not clear whether the $1.6 billion in federal tax  expenditures that these plans represent strategically targets limited  federal resources. Although 529 plans do help some families save for  college, families with less income and who are uncertain about whether  their children will attend college may have less incentive to invest  resources in 529 plans than in other forms of savings. In addition, the tax  benefits attractive to a higher-income family do not offer as much benefit  to a family with lower tax liability.

Questions about who benefits from this tax expenditure occur in an  environment of long-term fiscal challenges and difficult choices about how  the federal government allocates limited resources. Reviewing 529 plans  in conjunction with the other billions of dollars in federal educational  assistance provided through tax expenditures, credits, and deductions  could help Congress determine whether this program is meeting its goals.  Similar to GAO’s prior work on higher-education related tax expenditures,  our analysis of 529 college savings plans was not able to address all  questions that could inform future policy choices regarding 529 plans. For  example, what is the purpose of the federal tax benefits provided through  529 plans? Are the goals and objectives clearly defined and measurable?  Who is the target population for 529 plans and does the current structure  provide appropriate incentives for that population? How do the 529 plan  federal tax benefits interact with other programs, such as federal financial  aid and other higher education tax benefits and savings vehicles?

Consideration of these questions could facilitate continued congressional  oversight of this tax expenditure.

section_title: Agency Comments
paragraphs: We provided a draft of this report to Education, Treasury, and IRS for  comment. The agencies provided technical comments that were  incorporated, as appropriate.

We are sending copies of this report to the Secretary of Education,  Secretary of the Treasury, Commissioner of Internal Revenue, relevant  congressional committees, and other interested parties. In addition, the  report will be available at no charge on the GAO Web site at  http://www.gao.gov. If you or your staff have any questions about this  report, please contact me at sagerm@gao.gov or 202-512-6806. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. GAO staff who made key  contributions to this report are listed in appendix III.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our review examined: (1) the percentage and characteristics of families  enrolling in 529 plans, (2) the plan features and other factors that affect  participation in 529 plans, and (3) the extent to which savings in 529  plans affect financial aid awards. To answer these research objectives,  we analyzed government data; interviewed state 529 plan officials from  select states as well as industry representatives and academic experts;  reviewed plan documents and analyzed industry data; conducted a  literature review; interviewed federal, state, and institutional financial aid  officials; and reviewed Department of Education (Education) and Internal  Revenue Service (IRS) documents as well as relevant federal laws,  regulations and guidance.

We assessed the reliability of the data we used by reviewing  documentation, interviewing knowledgeable officials, and conducting  electronic testing on relevant data fields. We found the data we reviewed  reliable for the purposes of our analyses. We conducted this performance  audit from November 2011 to December 2012 in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.
subsections: section_title: Analysis of Government Data
paragraphs: To determine the percentage and characteristics of families enrolling in  529 plans, we reviewed data from the 2010 Survey of Consumer  Finances (SCF); the 2007-2008 National Postsecondary Student Aid  Study (NPSAS); and 2007-2010 Statistics of Income (SOI) federal tax  data. The 2010 SCF, 2007-2008 NPSAS, and 2010 SOI were the most  recent data available at the time of our engagement, so to ensure  consistency in reporting we adjusted all dollar amounts from previous  years’ data to 2010 dollars.

Each of these three data sources (SCF, NPSAS, and SOI) are based on  probability samples and estimates are formed using the appropriate  estimation weights provided with each survey’s data. Because each of  these samples follows a probability procedure based on random  selections, they represent only one of a large number of samples that  could have been drawn. Since each sample could have provided different  estimates, we express our confidence in the precision of our particular  sample’s results as a 95 percent confidence interval (e.g., plus or minus  2.5 percentage points). This is the interval that would contain the actual  population value for 95 percent of the samples we could have drawn.  Unless otherwise noted, all percentage estimates based on the SCF,  NPSAS, and SOI have 95 percent confidence intervals that are within 5  percentage points of the estimate itself, and all numerical estimates other  than percentages have 95 percent confidence intervals that are within 5  percent of the estimate itself.

For our analysis of the percentage and characteristics of families who  held 529 plans, we relied primarily on restricted data from the 2010 SCF.  SCF is a triennial survey sponsored by the Board of Governors of the  Federal Reserve System (Federal Reserve) to provide detailed  information on the finances of U.S. households. The SCF sample of 6,492  households represented approximately 118 million households in 2010. It  collects detailed financial characteristics on an economically dominant  single individual or couple (married or living as partners) in a household,  which we refer to as a family for the purposes of this report. For our  analysis, we aggregated financial information so that, unless otherwise  noted, all SCF estimates are for the family rather than the individual  survey respondent. We did not restrict our analysis to families with  children, in part, because 529 plans can be used for nearly anyone,  including one’s child, grandchild, niece, nephew, and oneself. However,  about 88 percent of families with 529 plans or Coverdell Education  Savings Accounts (Coverdells), a similar education savings vehicle, had  children 25 years of age or younger living with them. Our estimates for  529 plans included Coverdells because Federal Reserve officials said  respondents did not always distinguish between the two account types;  therefore, we did not separate these responses because of data reliability  concerns. However, the officials indicated that a larger share of the SCF  respondents reported having 529 plans than Coverdells. Further, using  SOI data, we estimate that in 2010 approximately 85 percent of tax filers  who took a distribution from either a 529 plan or a Coverdell reported  distributions from a 529 plan while 14 percent reported distributions from  a Coverdell and 1 percent reported distributions from both. We wrote an  analysis program that the Federal Reserve ran using their restricted SCF  dataset to separate information on Medical Savings Accounts and Health  Savings Accounts, which had been included in the 2010 public dataset  with 529 plans and Coverdells. Federal Reserve officials modified some  resulting information to protect the privacy of survey respondents, for  example by rounding dollar amounts.

Using SCF, we generated estimates on the percentage and  characteristics of families enrolled in 529 plans or Coverdells and of  families not enrolled in these plans. We examined family characteristics  such as wealth (financial assets), income, education, and race or  ethnicity. To calculate financial assets, we used the methodology the  Federal Reserve uses to produce variables for its published Bulletin  articles. This methodology included assets held in checking, savings, and  brokerage accounts, certificates of deposit, mutual funds, stocks, bonds,  life insurance, retirement accounts, and other vehicles such as 529 plans.  Assets held in retirement accounts included those in defined contribution  plans (e.g. a 401(k), individual retirement account, or thrift savings plan)  as well as in traditional pensions or defined benefit plans. To calculate  income, we used the family’s self-reported total income. To report the  family’s highest educational attainment, we reviewed the education of  each respondent and his or her partner or spouse and included whichever  was higher. We reported information on the respondent’s race or  ethnicity, which does not necessarily indicate the race or ethnicity of other  family members.

We used 2007-2008 NPSAS data to develop a similar demographic  profile for college students and generate other estimates on college costs  and financial aid amounts. NPSAS is a comprehensive study by  Education that examines how students and their families pay for higher  education. It includes nationally representative samples of 113,535  undergraduates, 12,585 graduate students, and 1,581 first-professional  students enrolled any time between July 1, 2007 and June 30, 2008. The  NPSAS data are based on administrative records and student interviews,  and NPSAS includes survey results from both students who received  financial aid and those who did not. While we used NPSAS to develop a  demographic profile for college students similar to the one we developed  for the general population using SCF, families with 529 plans are not  directly comparable to families of college students. For example, while  our estimates using SCF are for all families (including families with  children in college, with children not in college, and with no children), our  estimates for families using NPSAS are exclusively for families with a  current college student. In NPSAS, families include the student and the  student’s parents (if the student is dependent) or the student’s spouse  and dependents (if the student is independent). Further, the population of  NPSAS students’ families is not the same as the population of families  with a child in college because a family may have more than one student  in college in a given year. Consequently students’ family characteristics  derived from NPSAS are not directly comparable to family characteristics  based on the SCF, though for the purposes of our report we use similar  terminology to describe them. Similar to our analysis of SCF, we  generated estimates of the characteristics of college students’ families—  education, and race or ethnicity. To report income, we  including income,calculated the total income of (1) the student’s parents (if the student was  dependent) and (2) the student and the student’s spouse (if the student  was independent). To report the family’s highest educational attainment,  we reviewed the education of each student’s mother and father and  included whichever was higher. We also reported information on the  student’s race or ethnicity, which does not necessarily indicate the race or  ethnicity of other family members. We also developed separate estimates  for students who are considered either dependent on their parents or  independent for financial aid purposes.

We also used NPSAS to generate other estimates related to the cost of  college and amount of financial aid awards. First, we estimated the  median annual cost of attendance at 4-year public and private non-profit  institutions. This included tuition and fees, room and board,  transportation, and personal expenses, though the estimate is valid only  for students who attended one institution. Second, we estimated the  percentage of students who received grants and loans, as well as the  median amount of these grants and loans and the percent and amount of  college expenses remaining. Third, we generated estimates for the  proportion of students who filled out the Free Application for Federal  Student Aid (FAFSA) and, for those who did fill out the FAFSA, the  proportion who met certain criteria to have assets excluded from the  federal expected family contribution (EFC) and the proportion whose  assets affected the EFC. Finally, we calculated the percentage of  students who received state and institutional financial aid.

We also analyzed 2007-2010 taxpayer data from SOI to determine the  extent to which taxpayers used distributions from 529 plans for qualified  education expenses and how the tax savings from these plans were  distributed across income levels. The SOI individual tax return file is a  stratified probability sample of income returns filed with the IRS. The SOI  sample of 308,583 returns represented approximately 143 million tax  returns filed for 2010. We combined data from the SOI individual tax file  with information from the Form 1099-Q. A 529 plan must file a Form  1099-Q with the IRS and the account owner or beneficiary each time a  taxpayer receives a distribution from a 529 plan account. This form  includes information on the amount of the distribution and the earnings (or  loss) on the distribution. When taxpayers receive a Form 1099-Q, they  must determine if the distribution was used for qualified education  expenses. If the distribution, or any portion of it, was nonqualified, the  earnings portion is subject to taxes and, in some cases, a penalty. The  taxpayer determines the amount of taxes and penalty owed on the  nonqualified distribution by completing Form 5329, which is contained in  the individual tax return file. By combining information from the 1099-Q  with information in the individual tax return file, we identified the  percentage of taxpayers who reported nonqualified distributions that were  subject to a penalty. We also used SOI data to estimate the tax savings  by using the National Bureau of Economic Research’s (NBER) TAXSIM  Model, a microsimulation model of U.S. federal and state income tax  systems. TAXSIM calculates estimated liabilities under U.S. federal and  state income tax laws from actual tax returns that have been prepared for  public use by the Statistics of Income Division of the IRS. Our analysis  of the tax savings from 529 plans excludes returns with a filing status of  married filing separately.

section_title: Interviews with State 529 Plan Representatives, Academic Experts, and Industry Representatives
paragraphs: To provide information on the factors that affect participation we  interviewed officials from the following five state 529 plans and their  industry partners: Louisiana, Michigan, Pennsylvania, Utah, and Virginia.  We used College Savings Plan Network (CSPN) data to select states that  represented a variety of plan types (direct-sold, advisor-sold, and pre- paid), offered a number of features (i.e., various state tax benefits, state  matching program), and were geographically diverse. We also used  suggestions provided by academic experts and industry representatives  to inform our selection as well as to provide information on 529 plan  participation. We interviewed academic researchers (including the Center  for Social Development), industry regulators (the Financial Industry  Regulatory Authority and the Municipal Securities Rulemaking Board),  financial services companies (American Funds and UPromise), financial  experts (such as Financial Research Corporation and Morningstar),  College Savings Plan Network, Savingforcollege.com, and consumer  interest groups (Investment Company Institute and the American  Association of Individual Investors).

section_title: Analysis of Plan and Industry Data and Documentation
paragraphs: We analyzed CSPN data on state 529 plans to provide a national  overview of plan features, such as fees and state tax benefits. Biennially,  states submit plan data to CSPN through an online system to be posted  on the CSPN website. CSPN provided us with data on each state as of  July 2012. We analyzed the data for every state for both direct-sold and  advisor-sold plans on the following features: whether the state offers a  matching grant program, whether the state offers tax deductions for  contributions and the amount, whether the state offers tax credits for  contributions and the amount, types of investment options offered, total  contribution limits, and required initial contribution amounts. We also  analyzed the following fee categories: program manager fee, state fee,  annual account maintenance fee, miscellaneous fee, annual distribution  fee, estimated underlying fund expenses, total annual asset-based fees,  maximum deferred sales charge, and minimum initial sales charge.

Further, we compared CSPN disclosure principles with direct-sold plan  disclosure documentation for the five states we interviewed. We reviewed  the extent to which the selected states incorporated elements of the  CSPN disclosure principles and whether plan documentation was easily  comparable across states. Specifically, we compared whether the state  documents contained eleven elements outlined in the principles,  including: a summary of key features, an assessment of the individual  summary features, a statement of any guarantee by the state issuer or  the state, information on state tax treatment and other benefits,  information that the state offers more than one plan, fee descriptions, and  investment risks, among others. These elements were chosen based on  discussions with states and experts who identified plan fees, tax benefits,  and investment options as some of the most important features  consumers consider when choosing whether or not to participate in a 529  plan. In addition to recording whether states have disclosed the  information listed above, we assessed whether any information was  missing, where the information was located in the document, and any  other observations about the ability to find and understand plan  information.

section_title: Literature Review
paragraphs: We reviewed studies conducted by academics, researchers, industry  representatives, and federal agencies on why families choose to  participate in 529 plans and what features might serve as barriers or  incentives. We identified literature published since 2006, when Congress  passed the Pension Protection Act of 2006, Pub. L. No. 109-250, which  made permanent the tax-exemption on 529 plan distributions used for  qualified education expenses. Our review included scholarly/peer  reviewed material, government reports, hearings and transcripts,  trade/industry articles, association/nonprofit/think tank publications, and  working papers. We searched information sources such as EconLit,  ProQuest, ERIC, PolicyFile, WorldCat, ECO, PapersFirst, ArticleFirst, and  Academic OneFile. These online sources are nationally recognized  databases that index and abstract research literature. We selected search  terms to capture literature that specifically addressed 529 plans, college  savings plans, qualified state tuition programs, and prepaid tuition. Of the  32 studies we identified, 12 studies met the following criteria: 1) included  information on plan features in specific states, 2) addressed the  consequences for consumers of choosing one type of 529 plan over  another, 3) identified barriers or incentives for consumers to choose 529  plans, 4) included data collected by states on plan participation, and/or, 5)  included information on plan disclosures to consumers. All studies cited in  the report were reviewed by at least two GAO analysts. Studies that  included statistical methods were reviewed by a GAO statistician and  social science analyst. All studies were reviewed for methodological  soundness and to ensure that any limitations associated with study  methodologies were conveyed to readers in our report text, footnotes, or  this appendix.

section_title: Financial Aid Analysis
paragraphs: To understand the extent to which savings in 529 plans affect federal  financial aid awards, we interviewed Education officials in the Office of  Postsecondary Education. We also reviewed relevant statutory  provisions, the FAFSA, the Federal Student Aid Handbook, and other  Education documents related to calculating the EFC.

To understand the extent to which savings in 529 plans are considered in  state financial aid calculations, we interviewed officials from state financial  aid offices in six states. To select the state financial aid offices, we used  information from a 2009-2010 survey by the National Association of State  Student Grant and Aid Programs to identify states that indicated they  used a financial aid formula other than the federal methodology in their  primary needs analysis and/or provided special treatment for state 529  plans. For report consistency, we selected the same states selected for  529 plan site visit locations to the extent possible (i.e., where the data  supported the selection based on the criteria). We interviewed  representatives in the following state financial aid offices: Louisiana Office  of Student Financial Assistance, Michigan Office of Scholarships and  Grants, New York Higher Education Services Corporation, Pennsylvania  Higher Education Assistance Agency, Utah Higher Education Assistance  Authority, and State Council of Higher Education for Virginia.

We also selected six institutions from the states whose financial aid  offices were selected for interviews. To obtain a national perspective on  institutional financial aid and determine the best method for selecting the  individual institutions, we interviewed representatives at several financial  aid organizations including the Association of Private Sector Colleges and  Universities, the College Board, the National Association of Student  Financial Aid Administrators, the National Association of Independent  Colleges and Universities, and the American Association of Community  Colleges. In these interviews, some officials said that schools with larger  endowments were likely to require families to provide additional  information, such as that required on the College Board’s PROFILE  application, to award their institutional financial aid. We matched the  2012-2013 College Board’s list of institutions that use the PROFILE  application with Education’s 2009-2010 Integrated Postsecondary  Education Data System to calculate endowment amounts per student at  public and private non-profit four-year institutions. We also reviewed the  list of schools that participate in the Private 529 Consortium and selected  at least one school that was also part of this group. One state did not  have an institution that used the PROFILE application so we reviewed  websites of postsecondary schools in that state to identify a school that  collected data in addition to the FAFSA. We interviewed representatives  at the following institutions: Xavier University of Louisiana, University of  Michigan, St. Lawrence University, Swarthmore College, University of  Utah, and University of Richmond.

section_title: Appendix II: Free Application for Federal Student Aid, 2012-2013

section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
paragraphs: Michelle Sager, Acting Director, Education, Workforce, and Income  Security Issues, 202-512-6806 or sagerm@gao.gov.

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Gretta Goodwin (Assistant  Director), Amy Anderson, Rachel Beers, and Laura Henry contributed to  all aspects of this report. Also making key contributions were Carl Barden,  James Bennett, Nora Boretti, Jessica Botsford, Jason Bromberg, Alicia  Cackley, Melinda Cordero, Patrick Dudley, Shannon Finnegan, Kim  Frankena, Mark Glickman, David Lewis, Ashley McCall, John Mingus,  Mark Ramage, MaryLynn Sergent, George Scott, Walter Vance, Kathleen  van Gelder, and Michelle Loutoo Wilson.


Question-summary annotations: questions: question: How did U.S. families utilize 529 plans in 2010?
answer: A small percentage of U.S. families saved in 529 plans in 2010, and those who did tended to be wealthier than others. According to the Survey of Consumer Finances (SCF), less than 3 percent of families saved in a 529 plan or Coverdell Education Savings Account (Coverdell)--a similar but less often used college savings vehicle also included in the SCF.
child_questions: question: How popular are 529 plans?
answer: According to the Survey of Consumer Finances (SCF), less than 3 percent of families saved in a 529 plan or Coverdell Education Savings Account (Coverdell)--a similar but less often used college savings vehicle also included in the SCF.

question: Why might available income for education savings have been reduced?
answer: While the economic downturn may have reduced income available for education savings, even among those families who considered saving for education a priority, fewer than 1 in 10 had a 529 plan (or Coverdell).

question: How do families with 529 or Coverdell plans differ from families without these accounts?
answer: Families with these accounts had about 25 times the median financial assets of those without. They also had about 3 times the median income and the percentage who had college degrees was about twice as high as for families without 529 plans (or Coverdells).

questions: question: How do different types of 529 plans differ from each other?
answer: States offer consumers a variety of 529 plan features that, along with several other factors, can affect participation. Some of the most important features families consider when choosing a 529 plan are tax benefits, fees, and investment options, according to experts and state officials GAO interviewed. These features can vary across the state plans.
child_questions: question: How does plan type affect total annual asset-based fees?
answer: For example, in July 2012, total annual asset-based fees ranged from 0 to 2.78 percent depending on the type of plan.

question: What other factors affect 529 plan participation?
answer: 529 plan officials and experts GAO interviewed said participation is also affected by families' ability to save, their awareness of 529 plans as a savings option, and the difficulty in choosing a plan given the amount of variation between plans.
child_questions: question: How have some states taken steps to address these factors?
answer: Selected states, however, have taken steps to address these barriers. For example, to address families' ability to save, particularly for low-income families, some states have adopted plans that include less risky investments, have low minimum contributions, and match families' contributions.

questions: question: How do savings in 529 plans affect financial aid?
answer: Savings in 529 plans affect financial aid similarly to a family's other assets. For federal aid, a family's assets affect how much it is expected to contribute to the cost of college. If the amount of those assets exceeds a certain threshold, then a percentage is expected to be used for college costs.
child_questions: question: How is financial aid determined for students who are dependent on their parents?
answer: For example, for students who are dependent on their parents, the percentage of parental assets, including savings in 529 plans, that the family may be expected to contribute ranges from 2.64 to 5.64 percent.

question: How are 529 plans factored into family contribution in different states?
answer: Many states and selected institutions also treat 529 plan savings the same as other family assets. However, a few states provide them with special treatment, such as exempting those funds from their financial aid calculation.

questions: question: Why is paying for college becoming more challenging?
answer: Paying for college is becoming more challenging, partly because of rising tuition rates.
child_questions: question: How can 529 savings plans help families pay for college?
answer: A college savings plan can be an option to help meet these costs. To encourage families to save for college, earnings from 529 plans--named after section 529 of the Internal Revenue Code--grow tax-deferred and are exempt from federal income tax when they are used for qualified higher education expenses.
child_questions: question: How do 529 plans affect federal revenue?
answer: In fiscal year 2011, the Department of the Treasury estimated these plans represented $1.6 billion in forgone federal revenue.

question: How are 529 plans managed?
answer: Managed by states, over one hundred 529 plan options were available to families nationwide as of July 2012.

question: How hav 529 plans changed over the past decade?
answer: The number of 529 plan accounts and the amount invested in them has grown during the past decade.

question: Why did GAO conduct this report?
answer: GAO was asked to describe (1) the percentage and characteristics of families enrolling in 529 plans, (2) plan features and other factors that affect participation in 529 plans, and (3) the extent to which savings in 529 plans affect financial aid awards.
child_questions: question: How did GAO conduct research for this report?
answer: GAO analyzed government data, including the SCF. This survey's 529 plan data are combined with Coverdells, so the SCF estimates used in the report include both 529 and Coverdell data. GAO also analyzed National Postsecondary Student Aid Study data; conducted interviews with federal and state officials, industry and academic experts, and state and institutional higher education officials; reviewed 529 plan and Department of Education documents; conducted a literature review; and reviewed relevant federal laws, regulations, and guidance.