Yesterday DHHS spokesperson Sam Adolphsen hit back at a BDN editorial which pointed out that the new rule would undermine people’s ability to climb out of poverty.
As part of his response, Adolphsen notes that “college savings accounts, such as 529 plans” are excluded from the assets.
In fact, the asset test hurts students and families who put aside some money who would otherwise qualify for food stamps.
Imagine a student who worked during high school, putting some money aside for college.
Perhaps this student got up early every morning to deliver the paper and/or had an after school job, babysat during weekends, and held down a summer job.
By these efforts, he or she has put enough aside to pay at least some of the billed costs before freshman year. To avoid too much debt, this student works during school and every summer.
Food stamps are available to just some college students, including those with work-study jobs and those caring for dependents less than 6 years old.
However, savings over $5000, accrued over time in a savings account, would make her or him ineligible.
LePage’s policy would make it harder for this saver to finish college, to earn a good salary, and to pay taxes that support others who are reaching for opportunity.
It’s critical to recognize, as the LePage administration does not, that this hard-working, thrifty student is quite likely to have college savings in a saving account, not a 529.
People who are anywhere near qualifying for food stamps are very, very unlikely to have 529 plans.
Standard advice for paying for college is that it’s typically going to be financed with past earnings (savings), current earnings (working during college years) and future earnings (loans). But very few families have 529 or similar accounts.
As an extensive study by the GAO, titled “A Small Percentage of Families Save in 529 Plans,” found that less than 3% of families have either 529s or Coverdells.
They’re just a bit more common among families who expect big educational expenses.
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. [source]
Not only is having these plans quite unusual.
Families with these plans also have much higher incomes than most families.
The median income of families with 529 plans or Coverdells was about three times the median income of families without these accounts. Specifically, families with 529 plans or Coverdells had median incomes of about $142,400 per year compared to $45,100 for other families. Moreover, we estimate that 47 percent of families with 529 plans or Coverdells had incomes over $150,000, compared to 8 percent for families without these accounts. [source]
The GAO has this nice graphic illustrating why these accounts are so rare, and so concentrated among people so far from the median family income.
But there’s another reason why this 529 exclusion makes no sense.
Even if a family had such a plan, they’d be foolish to have the funds in it when the student is in college or about to go.
The standard financial advice is to take money out of such an account several years before college, so the fund isn’t exposed to the instability of the stock market.
If a student or family had saved in a 529 or Coverdell, it should have been moved to a FDIC guaranteed savings account. Thus it would count as part of assets.
Even in the short term, there would be a time when the funds were withdrawn from the 529 to pay college costs.
If the student received food stamps, she or he would be over the asset limit during that period. By not reporting the assets in a savings account, the student could get in legal trouble.
As a result, excluding 529s from the asset test does virtually nothing to make the policy better for students seeking to improve their lot.
It’s unclear if those who designed the LePage policy know that.
But it’s quite certain that the LePage food stamp assets policy doesn’t protect college savings but rather undermines opportunity.