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School Choice & Charters

How a Savings Program Could Be Used to Expand School Choice

By Alyson Klein — August 02, 2017 3 min read
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President Donald Trump and U.S. Secretary of Education Betsy DeVos came to Washington promising a massive new federal investment in school choice. So far, they’re having trouble getting momentum—and money—for vouchers or a tax-credit scholarship.

But some school choice supporters may have another policy up their sleeves: allowing parents to save for private school the same way many of them save for college, through the use of so-called 529 plans.

These plans—named for a section of the federal tax code—are a tax-advantaged investment fund that works somewhat like an IRA or 401(k) retirement plan. Parents or guardians put a portion of their income in the fund and can receive a tax credit or deduction, depending on the specifics of the plan, which can vary state-by-state.

Right now, 529s are primarily for college expenses. But the Heritage Foundation, a favorite think tank for the Trump team and Republicans in Congress, would love to see the accounts expanded to K-12 schools.

Another, similar option: lifting the cap on an another type of savings account, so-called “Coverdell accounts,” which allow families to put money away for both K-12 and higher education expenses, again with tax advantages. Right now, the cap on the accounts is $2,000. Heritage would love to see it lifted.

The idea has some at least one big champion: Rep. Luke Messer, R-Ind., has introduced a bill that would both raise the cap on Coverdells and extend 529s to K-12. Messer, whose former aide, Rob Goad, is now a top aide at the U.S. Department of Education, is running for Senate.

The 529 or Coverdell option has some big advantages for conservatives, said Lindsey Burke, the director of the Center for Education Policy at Heritage. For one thing, unlike a brand new federal tax credit scholarship, it wouldn’t create a new program, at least in her eyes.

“It’s an existing program that’s in place, you’re not growing the size of federal intervention in K-12,” she said. “It’s just an individual saving their own money.”

A federal tax credit scholarship, on the other hand, would give a tax credit to corporations and individuals who donate to scholarship granting organizations. Burke worries this could lead to a lot of unnecessary federal intrusion, including unintended consequences for states that already have their own tax credit scholarships. (More from Heritage on tax credit scholarships here.)

But opponents of other forms of school choice, including tax-credit scholarships, and vouchers, are also not fans of 529 plans.

“It is diverting revenue when we’re in a position where we have a president and secretary of education who are looking to cut almost $9 billion” in federal funding for education, said Mary Kusler, the senior director for the National Education Association’s Center for Advocacy.

And she said the money may not actually help the neediest families, since parents would have to have extra income to set-aside in the first place in order to get the tax advantages 529s and Coverdells offer.

“You’re providing a tax benefit for people who are likely already sending their children to private schools,” Kusler said.

Burke agreed that the policy shift wouldn’t help everyone, which is why she’d like to see it paired with another school choice-friendly initiative that would have more impact on poor families, such as allowing federal Title I dollars—which help districts educate disadvantaged kids—follow students to the school of their choice, including a private school. That’s not an easy pitch. In fact, school choice fans tried to get that included in the Every Student Succeeds Act, but House lawmakers defeated it.

So what are the chances of 529s for K-12 or expanded Coverdell accounts actually making it over the legislative finish line? It’s probably a long shot, at least for now. An expansion of 529s or Coverdell accounts would likely be tied to a GOP tax overhaul bill that Republican leaders are working on behind the scenes.

No one knows for sure what’s going to be in that package. But there are some clues in a blueprint released by the House Ways and Means Committee last summer. The blueprint talks a lot about revamping various college access and apprenticeship programs—potentially including 529s—but it doesn’t say anything specific about school choice. And lawmakers have been clear that any extra costs in the bill, like a new tax benefit, would need to be paid for in some other way.

Still, given the Trump administration’s enthusiasm for school choice, the 529 issue is one worth keeping your eye on.