Tax Policy and Education Policy: Collision or Coordination? A Case Study of 529 and Coverdell Savings Vehicles

Susan Dynarski

Working Paper Series from Harvard University, John F. Kennedy School of Government

Abstract: 529 saving plans and Coverdell Educational Savings Accounts are marketed as attractive vehicles for college savings. The main finding of this paper is that college savings plans can actually harm some families. The joint treatment by the income tax code and financial aid system of college savings creates tax rates that exceed 100 percent for those families on the margin of receiving additional financial aid. Since even families with incomes above $100,000 receive need-based aid, the impact of these very high taxes is quite broad. I find that an aid-marginal family with funds in a Coverdell is worse off than if it did not save at all. Simulations show that $1,000 of pretax income placed in a Coverdell for a newborn and left to accumulate until college will face income and aid taxes that consume all of the principal, all of the earnings and an additional several hundred dollars. This perverse outcome is the product of poor coordination between the income tax code and the financial aid system.

Date: 2004-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://papers.nber.org/papers/w10357.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecl:harjfk:rwp04-011

Access Statistics for this paper

More papers in Working Paper Series from Harvard University, John F. Kennedy School of Government Contact information at EDIRC.
Bibliographic data for series maintained by ().