A public policy expert says Congress should redesign current federal college savings tax incentives.[@@]

The current incentives do virtually nothing to help low-income students pay for college, Susan Dynarski, an assistant professor of public policy at Harvard University, testified Thursday at a Senate Finance Committee hearing on efforts to strengthen the U.S. workforce by improving higher education financing.

Dynarski discussed the Section 529 college savings program, the Coverdell Education Savings Account program, the tuition tax deduction and the 2 college tax credit options

The programs can be helpful for high-income and middle-income families send their children to private schools, Dynarski said, according to a written version of her remarks.

“But, as structured, the tax incentives do not encourage more people to go to college,” Dynarski said. It is the student “who is trying to decide whether college is the right path, her family nervous about the costs, that we need to help if we want to increase the skills of our workforce,” Dynarski said. “Making the local community college or public university cheaper may just convince her to go to college. Making Harvard cheaper will not.” Dynarski added that the government and colleges have reduced the effectiveness of existing college savings incentives by failing to coordinate the savings programs with financial need calculations.

She noted, for example, that the standard financial aid formula calls for a college to deduct $1 from the aid package for every dollar that a student has in Section 529 plan assets.

Dynarski said tax code writers can address by the problems by focusing incentives on families with students on the brink of college, simplifying the incentives so that families understand and respond to them, and coordinating the incentives with financial aid to avoid harming families who get aid. Other hearing witnesses praised current federal college savings programs and asked for Congress to eliminate a sunset provision that could let the 529 program expire at the end of 2010.

Charles Toth, director of education savings at Merrill Lynch & Company Inc., New York, testified on behalf of the College Savings Foundation, Washington, and the Securities Industry Association, Washington, that while “almost overnight, 529 programs are becoming the bedrock of higher education savings strategies for more and more American families,” a cloud hangs over the program. “The 529 plan holds the promise of revolutionizing the way Americans finance college, shifting away from ‘pay-as-you-go’ financing and ‘pay-after-you-go’ loans to a more certain and less disruptive prefunding of a growing portion of higher education costs,” Toth said. “Regrettably, that promise will not be fulfilled unless the Dec. 31, 2010, sunset on the Section 529 tax advantages is eliminated and the current 529 plan rules are made permanent.”

Failing to make the program permanent would be unfair to families with children who will reach college age after the sunset date, Toth said.

Links to the text of the hearing witnesses’ testimony are on the Web at http://finance.senate.gov/sitepages/hearing072204.htm