Few parents are using 529 savings plan for their school-aged children’s tuition more than a year after the Trump Administration first allowed the tax-advantaged funds to go to K-12 private education, according to several plan administrators.
About 5.5% of withdrawals for beneficiaries 16 and under were made in 2018, up 4% from 2016, according to Ascensus, which administers 529 plans for 20 states and the District of Columbia.
In Virginia, which has the largest 529 plan by participation, only a fraction of 1% of the dollars distributed in the previous school year went to private or parochial school tuition.
“It hasn’t been a groundswell by any stretch of the imagination,” said Virginia529 CEO Mary Morris.
The lack of participation doesn’t necessarily reflect disinterest, administrators say, but rather an unawareness by the American public of the change in regulation.
Varied response to new 529 rule
The new tax law signed by President Trump at the end of 2017 expanded the qualified use of 529 savings accounts to include tuition for K-12 private and parochial education. Before only withdrawals made to pay for higher education expenses were considered qualified.
Adoption of the new rule has not been uniform by state. Some states aren’t offering the same tax treatment for withdrawals made for K-12 education.
In Colorado, for example, withdrawals used to pay for K-12 tuition expenses are still considered unqualified withdrawals and subject to penalties, according to the state’s 529 plan website, CollegeInvest.org.
Other states, like Virginia, are choosing to highlight saving for college rather than promoting 529s for primary and secondary school costs.
“We see that as our real mission to save for the long term,” Morris said. “We have sent out messaging that it can be used for K-12 as well, but it’s not the focus in terms of outreach.”
States embracing 529s for K-12
There are states, though, taking other tacks, said Peg Creonte, senior vice president of business development at Ascensus.
“Some states are neutral,” she says. “And on the other end of the spectrum, some states are actively encouraging people to use the funds for K-12.”
Take Louisiana: The state created a specific 529 savings plan for K-12 tuition expenses – called START K12 – in December 2018. Unused funds in the account can be rolled over to the state’s 529 plan intended for higher education costs.
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The state poured resources into advertising it. There was a media tour with Rep. Franklin Foil, who authored the program’s legislation. Foil made morning show appearances on local and statewide news outlets, said Brittany Francis, a spokeswoman for the Louisiana Office of Student Financial Assistance.
In the first eight months of this year, the START K12 program opened 600 accounts with about $1.1 million saved. That represents about 16% of the 3,791 529 accounts opened in the state during that period.
By contrast, the Virginia 529 program so far has seen about 800 accounts opened for K-12 expenses, or just 1.6% of the 50,000 new accounts that open on average each year, Morris said. However, some customers are tapping funds in existing plans for elementary, middle school and high school costs, she pointed out.
Future of 529 plans
More parents may take advantage of 529s if the government further expands its uses to pay for uniforms or tutoring to make them more appealing to folks who don’t send their children to private school, Morris said.
It also takes time for the change in 529 rules to permeate, Creonte said.
“We’re taking a wait-and-see approach to see how it will impact how people are using 529s,” she said. “It will take five years.”