Changes Are Here for K-12, College Savings Plans

by Jonathan Butcher
July 30, 2018

College students will be heading back to campus in a few weeks, and a nontrivial consideration for students and parents will be how to pay for tuition in the fall. But recent changes to federal tax law may affect how millions of families consider K-12 and postsecondary options in the future.

In 2017, Washington lawmakers amended federal law so that parents and families that save money in 529 college savings plans can use their savings for K-12 private school tuition along with college expenses like tuition and books. 529 savings plans are named after part of the federal tax code and allow families to save money for postsecondary expenses (and now K-12 private school tuition). The accounts offer certain federal tax incentives for saving, and many states also provide tax benefits.

Washington’s decision to allow families to use 529 accounts to pay for K-12 private school tuition is welcome—it’s account holders’ money, after all—but now state lawmakers should make sure state law does not interfere.

For example, in California, state law “does not conform to the new federal tax treatment,” which means that state tax benefits for 529 savings may not apply for K-12 private school tuition. Similarly, in Oregon, lawmakers enacted legislation eliminating the tax benefits for families that use 529 savings for K-12 expenses—making it less advantageous to save for K-12 private school tuition with a 529. Some states, such as Minnesota, have not determined if the state law comports with the federal changes.

For some parents, using 529 accounts to find a high-quality private school would be worth the money in order to prepare a student for college, even if the student may have less to use later for college tuition. Better to avoid remedial college classes and finish in four years than have to play catch-up and delay entering the workforce.

For others, the new federal law won’t change their college plans. The key to this new federal policy is that parents and students have more choices with their own money, and state policymakers should not limit this new option.

Parents and students should talk to a tax advisor and check their 529 plan’s website for updates on how their state policymakers interpret the new federal law as it relates to state tax codes. The Heritage Foundation is preparing a guide on this topic before the next legislative session.

When it comes to K-12 and postsecondary laws, usually states are the ones trying to wrest control back from Washington because of federal overreach. Education is a priority for states, and Washington is often guilty of overstepping its bounds. But the change to 529 savings accounts made Washington the one offering flexibility, and now states need to make sure families and students have more choices with their savings.

Jonathan Butcher is a Senior Fellow at the Goldwater Institute. 

Article cross-posted from SeeThruEDU, a project of the Texas Public Policy Foundation.