Increase savings for college
By Congressman Joe Pitts
One of the top issues confronting American families today is how to pay for college. This is why I have just introduced the Help Kids Save for College Act.
Political pundits, pollsters, and politicians continue to lament the growing unease amongst the American people regarding their financial security. American families have seen a persistent increase in the cost of food, healthcare, and gasoline at the pump. One of the kitchen table issues that has predated even these rising prices has been the skyrocketing cost of higher education.
According to the College Board, the average cost of tuition for the 2007-2008 school year is $6,815 at public four-year schools (a 6.6 percent increase from last year) and $23,712 at private four-year schools (a 6.3 percent increase over last year). At current rates, college tuition is doubling roughly every 10 years.
Higher education should be affordable. It opens up a world of opportunities for people. And higher education will become ever more important as the global economy requires our nation's workers to be more high-skilled in order to compete. The College Board estimates a bachelor's degree increases an individual's earning potential over a lifetime by more than $800,000. There is little disagreement over the desirability of making higher education affordable and accessible.
I believe one of the best ways government can help families pay for college is to help them save for college. Increasing savings is just one part of the solution, but it is an important one.
American savings rates are problematically low. Parents may not stay awake at night lamenting the fact that the U.S. savings rate in 2007 was just 0.5 percent (compared to 11 percent in 1984), but many parents probably do worry how they will pay for their child's college education. Though the federal government already provides assistance in the form of Perkins Loans, Stafford Loans, Pell Grants, and other programs, clearly, Congress needs to do more to help families save for important things like college.
Congress created 529 accounts in order to create an incentive for families to save for college. The accounts, named after their section in the tax code, allow tax free interest to build on the funds set for qualified education expenses. Tuition, as well as room and board, fees, and books are covered as qualified expenses.
However, 529s can still be improved in order to promote further saving for higher education. This is why I have introduced the Help Kids Save for College Act, H.R. 5591. This legislation would allow employers to make tax free matching contributions to an employee's 529 accountup to $500 a year. Allowing an employee to receive tax free income from his or her employer creates a powerful incentive to save by requiring a contribution from the employee in order to receive the matching funds from the employer. Many employers will be eager to offer another tax free benefit to their employees.
Each state offers its own 529 plan, but you can invest in any of them you choose. Many offer a variety of investment options. They are similar to retirement accounts in that the holder of the account can choose different investment options based on the desired rate of return and comfort level with risk.
Though $500 a year may not sound like a lot, the power of compounded interest can take you a long way. Including interest gained from a 10 percent rate of return, $500 a year over 18 years will equal $25,080. This means if parents contribute $500 a year over 18 years, and have that number matched by an employer, the account could contain $50,000 by the time their child leaves for college. And individuals are able to contribute more than $500 a year if they would like.
529 accounts help families pay for college while increasing their savings rate and overall financial security. All of these are beneficial outcomes. I look forward to working with my colleagues in the House to gain support for my college savings legislation in order to further enhance the attractiveness of 529s.