This is the accessible text file for GAO report number GAO-13-64 
entitled 'Higher Education: A Small Percentage of Families Save in 529 
Plans' which was released on December 12, 2012. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as 
part of a longer term project to improve GAO products' accessibility. 
Every attempt has been made to maintain the structural and data 
integrity of the original printed product. Accessibility features, 
such as text descriptions of tables, consecutively numbered footnotes 
placed at the end of the file, and the text of agency comment letters, 
are provided but may not exactly duplicate the presentation or format 
of the printed version. The portable document format (PDF) file is an 
exact electronic replica of the printed version. We welcome your 
feedback. Please E-mail your comments regarding the contents or 
accessibility features of this document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

United States Government Accountability Office: 
GAO: 

Report to the Chairman, Committee on Finance, U.S. Senate: 

December 2012: 

Higher Education: 

A Small Percentage of Families Save in 529 Plans: 

GAO-13-64: 

GAO Highlights: 

Highlights of GAO-13-64, a report to the Chairman, Committee on 
Finance, U.S. Senate. 

Why GAO Did This Study: 

Paying for college is becoming more challenging, partly because of 
rising tuition rates. A college savings plan can be an option to help 
meet these costs. To encourage families to save for college, earnings 
from 529 plans—named after section 529 of the Internal Revenue Code—
grow tax-deferred and are exempt from federal income tax when they are 
used for qualified higher education expenses. In fiscal year 2011, the 
Department of the Treasury estimated these plans represented $1.6 
billion in forgone federal revenue. Managed by states, over one 
hundred 529 plan options were available to families nationwide as of 
July 2012. The number of 529 plan accounts and the amount invested in 
them has grown during the past decade. GAO was asked to describe (1) 
the percentage and characteristics of families enrolling in 529 plans, 
(2) plan features and other factors that affect participation in 529 
plans, and (3) the extent to which savings in 529 plans affect 
financial aid awards. GAO analyzed government data, including the SCF. 
This survey’s 529 plan data are combined with Coverdells, so the SCF 
estimates used in the report include both 529 and Coverdell data. GAO 
also analyzed National Postsecondary Student Aid Study data; conducted 
interviews with federal and state officials, industry and academic 
experts, and state and institutional higher education officials; 
reviewed 529 plan and Department of Education documents; conducted a 
literature review; and reviewed relevant federal laws, regulations, 
and guidance. 

What GAO Found: 

A small percentage of U.S. families saved in 529 plans in 2010, and 
those who did tended to be wealthier than others. According to the 
Survey of Consumer Finances (SCF), less than 3 percent of families 
saved in a 529 plan or Coverdell Education Savings Account (Coverdell)—
a similar but less often used college savings vehicle also included in 
the SCF. While the economic downturn may have reduced income available 
for education savings, even among those families who considered saving 
for education a priority, fewer than 1 in 10 had a 529 plan (or 
Coverdell). Families with these accounts had about 25 times the median 
financial assets of those without. They also had about 3 times the 
median income and the percentage who had college degrees was about 
twice as high as for families without 529 plans (or Coverdells). 

States offer consumers a variety of 529 plan features that, along with 
several other factors, can affect participation. Some of the most 
important features families consider when choosing a 529 plan are tax 
benefits, fees, and investment options, according to experts and state 
officials GAO interviewed. These features can vary across the state 
plans. For example, in July 2012, total annual asset-based fees ranged 
from 0 to 2.78 percent depending on the type of plan. 529 plan 
officials and experts GAO interviewed said participation is also 
affected by families’ ability to save, their awareness of 529 plans as 
a savings option, and the difficulty in choosing a plan given the 
amount of variation between plans (see figure 1). Selected states, 
however, have taken steps to address these barriers. For example, to 
address families’ ability to save, particularly for low-income 
families, some states have adopted plans that include less risky 
investments, have low minimum contributions, and match families’ 
contributions. 

Figure: Factors that Affect 529 Plan Participation: 

[Refer to PDF for image: illustration] 

Families often don't save for college because they may not have the 
resources to save or underestimate college costs. 

For families who do save, many don't know how 529s can help them. 

Even families who want to take advantage of a 529 plan can hae trouble 
selecting and using one. 

Source: GAO analysis based on reports and interviews with 529 plan 
officials and experts. 

[End of figure] 

Savings in 529 plans affect financial aid similarly to a family’s 
other assets. For federal aid, a family’s assets affect how much it is 
expected to contribute to the cost of college. If the amount of those 
assets exceeds a certain threshold, then a percentage is expected to 
be used for college costs. For example, for students who are dependent 
on their parents, the percentage of parental assets, including savings 
in 529 plans, that the family may be expected to contribute ranges 
from 2.64 to 5.64 percent. Many states and selected institutions also 
treat 529 plan savings the same as other family assets. However, a few 
states provide them with special treatment, such as exempting those 
funds from their financial aid calculation. 

What GAO Recommends: 

GAO is not making any recommendations in this report. 

View [hyperlink, http://www.gao.gov/products/GAO-13-64]. For more 
information, contact Michelle Sager, (202) 512-6806, sagerm@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Few Families Have 529 Plans and Those Who Do Tend to Be Wealthier: 

States' 529 Plan Features and Other Factors Can Affect Participation: 

Savings in 529 Plans Affect Financial Aid the Same as Other Assets: 

Concluding Observations: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Free Application for Federal Student Aid, 2012-2013: 

Appendix III: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Estimates of Selected Characteristics of College Students' 
Families (from NPSAS) and Families with and without 529 Plans (from 
SCF): 

Table 2: Fee Ranges (Percent) for College Savings Plans, Direct-Sold 
and Advisor-Sold: 

Figures: 

Figure 1: 529 Plan Timeline and Assets Invested: 

Figure 2: 529 Plan Account Growth: 

Figure 3: FAFSA Questions on Student and Parent Assets, Including 529 
Plans: 

Figure 4: Distribution of Income for Families with and without 529 
Plans or Coverdells (from SCF): 

Figure 5: Factors that Affect 529 Plan Participation: 

Figure 6: Expected Family Contribution from Parents' Assets for 
Dependent Student: 

Figure 7: FAFSA Questions on Student Untaxed Income: 

Abbreviations: 

Coverdells: Coverdell Education Savings Accounts: 

CSPN: College Savings Plan Network: 

Education: Department of Education: 

EFC: expected family contribution: 

EGTRRA: Economic Growth and Tax Relief Reconciliation Act of 2001: 

FAFSA: Free Application for Federal Student Aid: 

FDIC: Federal Deposit Insurance Corporation: 

Federal Reserve: Board of Governors of the Federal Reserve System: 

IRS: Internal Revenue Service: 

MSRB: Municipal Securities Rulemaking Board: 

NBER: National Bureau of Economic Research: 

NPSAS: National Postsecondary Student Aid Study: 

SEC: Securities and Exchange Commission: 

SCF: Survey of Consumer Finances: 

SOI: Statistics of Income: 

Treasury: Department of the Treasury: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

December 12, 2012: 

The Honorable Max Baucus:
Chairman:
Committee on Finance:
United States Senate: 

Dear Mr. Chairman: 

While median family income decreased between 2005 and 2011, college 
tuition and fees increased at an average annual rate of 6 percent, 
more than double the rate of inflation. As families look for ways to 
prepare for these rising costs, their options include saving in 
advance; paying for expenses at the time they occur out-of-pocket 
and/or through grants and scholarships; or financing the cost through 
educational loans that they repay at a later date. Loans have become 
an increasingly popular option to cover these costs.[Footnote 1] 
However, with college loan balances now estimated at $914 billion, 
more than total credit card debt,[Footnote 2] financing a large 
portion of college costs potentially creates a future financial burden 
for students and their families. To encourage people to save for 
college expenses in advance, Congress, in 1996, added section 529 to 
the Internal Revenue Code, which authorized state qualified tuition 
programs, otherwise known as 529 plans.[Footnote 3] These plans are 
available in two forms--prepaid tuition plans and college savings 
plans. In prepaid tuition plans, participants buy tuition credits or 
certificates on behalf of a designated beneficiary, who can use them 
for qualified higher education expenses.[Footnote 4] College savings 
plans allow for contributions to an account for the purpose of paying 
a designated beneficiary's qualified higher education expenses. As of 
July 2012, more than one hundred 529 plan options have been developed 
and are managed by states and the District of Columbia. In 2011, there 
were more than 11 million accounts with assets of $167 billion (in 
2012 dollars).[Footnote 5] 

While there is no federal tax deduction for payments or contributions 
to 529 plans, which are made with after-tax dollars, plan earnings 
accumulate tax-deferred and earnings included in withdrawals used to 
pay for qualified higher education expenses are not taxed. This tax 
expenditure cost the federal government an estimated $1.6 billion in 
forgone revenue in fiscal year 2011.[Footnote 6] We reported, in 2012, 
that higher income households are more likely to have 529 plans and 
tend to benefit more from these tax preferences because of their 
higher marginal tax rate.[Footnote 7] We have recommended in the past 
that tax expenditures be periodically reviewed to determine their 
effectiveness in achieving specific policy goals, particularly given 
the nation's long-term fiscal imbalance.[Footnote 8] 

In response to your request to examine the extent to which 529 plans 
help families of all income levels save for college and how these 
plans affect student financial aid, we reviewed (1) the percentage and 
characteristics of families enrolling in 529 plans, (2) the plan 
features and other factors that affect participation in 529 plans, and 
(3) the extent to which savings in 529 plans affect financial aid 
awards. 

To answer these research objectives, we analyzed government and 
industry data; conducted interviews with federal and state officials, 
industry representatives and academic experts, as well as state and 
institutional higher education officials; reviewed 529 plan and 
Department of Education (Education) documents; conducted a literature 
review; and reviewed relevant federal laws, regulations, and guidance. 
We assessed the reliability of the data we used by reviewing 
documentation, interviewing knowledgeable officials, and conducting 
electronic testing on relevant data fields. We found the data we 
reviewed reliable for the purposes of our analyses. 

To determine the percentage and characteristics of families enrolling 
in 529 plans, we reviewed data from the 2010 Survey of Consumer 
Finances (SCF); the 2007-2008 National Postsecondary Student Aid Study 
(NPSAS), which was the most recent available and which we adjusted to 
2010 dollars; and 2007-2010 Statistics of Income (SOI) federal tax 
data. Our analysis of data from SCF, NPSAS, and SOI are subject to 
sampling errors because these data sets are based on samples. Unless 
otherwise noted, all percentage estimates based on SCF, NPSAS, and SOI 
have 95 percent confidence intervals that are within 5 percentage 
points of the estimate itself, and all numerical estimates other than 
percentages have 95 percent confidence intervals that are within 5 
percent of the estimate itself. Using SCF data, we generated estimates 
of the characteristics of households--including wealth (financial 
assets), income, education, and race/ethnicity--enrolled in 529 plans 
or Coverdell Education Savings Accounts (Coverdells)[Footnote 9] and 
compared those to characteristics of families not enrolled in these 
plans. Our estimates are based on analyses from the restricted SCF 
dataset and were conducted with assistance from officials at the Board 
of Governors of the Federal Reserve System (Federal Reserve). We also 
developed a profile of the general college population using NPSAS 
data. In addition, we analyzed taxpayer data from SOI and used a 
microsimulation model from the National Bureau of Economic Research to 
understand the extent to which taxpayers use withdrawals (known as 
distributions) from 529 plans for qualified educational expenses and 
how the tax savings from these plans are distributed across income 
levels. 

To understand the features and factors that affect participation, we 
interviewed officials from five state 529 plans (Louisiana, Michigan, 
Pennsylvania, Utah, and Virginia), conducted a literature review, and 
spoke with academic researchers, industry regulators, financial 
services companies, financial experts, and consumer interest groups. 
While we selected the five state plans to represent variety in the 
types of plans offered, benefits, and geographic location, our 
findings cannot be generalized to all 529 plans. We also analyzed 
College Savings Plan Network (CSPN) data to provide a national 
overview of plan features and benefits.[Footnote 10] To provide 
information on the percentage of students who receive financial aid 
and the median award amount, we analyzed NPSAS data. To assess efforts 
by states to disclose 529 plan information to consumers, we reviewed 
disclosure documents from selected states as well as CSPN disclosure 
principles. 

We assessed the extent to which savings in 529 plans affect federal 
financial aid awards by reviewing relevant federal laws, regulations, 
and guidance, and interviewing Education officials. In addition, we 
analyzed NPSAS data to determine the extent to which a family's total 
assets affected the federal expected family contribution to college 
expenses. To understand how savings in 529 plans affect state and 
institutional financial aid, we interviewed six state financial aid 
offices and six institutions of higher education. We selected states 
that indicated on a National Association of State Student Grant and 
Aid Programs survey that they used a financial aid formula other than 
the federal methodology in their primary needs analysis and/or 
provided special treatment for state 529 plans. We selected an 
institution in each of the six states that was reported as using the 
College Board's PROFILE or another institutional form, in addition to 
the Free Application for Federal Student Aid, to gather information 
used in making decisions regarding institutional financial 
aid.[Footnote 11] To obtain an institutional perspective beyond the 
six schools, we interviewed officials from national organizations 
representing community colleges, private nonprofit and public colleges 
and universities, and for-profit schools. A more detailed explanation 
of our methodology is available in appendix I. 

We conducted this performance audit from November 2011 to December 
2012 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Background: 

History of 529 Plans: 

529 plans are a college savings vehicle that originated in the states. 
In 1986, Michigan created the Michigan Education Trust to operate what 
is generally considered the first state prepaid tuition plan. In 1996, 
Congress enacted Section 529 of the Internal Revenue Code, setting out 
requirements that state 529 plans must meet to be exempt from federal 
tax. The Economic Growth and Tax Relief Reconciliation Act of 2001 
included a provision making earnings included in distributions from 
529 plan accounts entirely tax-exempt as long as they are used to pay 
for qualified higher education expenses.[Footnote 12] For other key 
legislative actions and the value of assets invested in these plans, 
see figure 1. 

Figure 1: 529 Plan Timeline and Assets Invested: 

[Refer to PDF for image: timeline and vertical bar graph] 

Year-end assets in billions of 2012 dollars: 

1986: 
In what is generally considered the first 529 plan, Michigan creates 
the Michigan Education Trust to operate a prepaid plan that opens in 
1988. 

1994: 
The U.S. Court of Appeals for the Sixth Circuit rules that investment 
income from the Michigan Education Trust is not subject to federal 
income tax.[A] 

1996: 
Congress enacts section 529 of the Internal Revenue Code, establishing 
federal rules for 529 plans. 

2001[B]: 
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) 
makes 529 earnings distributions tax-exempt as long as they are used 
for qualified education expenses. 
Year-end assets: $19.4 billion. 

2002: 
Year-end assets: $33.4 billion. 

2003: 
Year-end assets: $56.2 billion. 

2004: 
Year-end assets: $77.4 billion. 

2005: 
Year-end assets: $94.6 billion. 

2006: 
Congress makes permanent the EGTRRA provision that allows for tax-
exempt distributions of 529 earnings[C]; 
Year-end assets: $118.8 billion. 

2007: 
Year-end assets: $139.4 billion. 

2008: 
Year-end assets: $110.5 billion. 

2009: 
Year-end assets: $139.2 billion. 

2010: 
Year-end assets: $162.8 billion. 

2011: 
Year-end assets: $167.0 billion. 

Source: GAO analysis of Financial Research Corporation data and 
relevant legislation. 

Notes: 

[A] Michigan v. United States, 40 F.3d 817 (6th Cir. 1994). 

[B] We chose to present account data starting in 2001 because the 
federal tax-exempt status for distributions was granted in 2001 and 
data were not available for all previous years. 

[C] Pension Protection Act of 2006, Pub. L. No. 109-280, tit. XIII § 
1304, 120 Stat. 789, 1109. 

[End of figure] 

The number of 529 plan accounts has also increased since the plans 
were granted expanded federal tax advantages in 2001 (see figure 2). 

Figure 2: 529 Plan Account Growth: 

[Refer to PDF for image: stacked vertical bar graph] 

Number of 529 plan accounts: 

Year: 2001; 
College savings plan accounts: 1.3 million; 
Prepaid tuition accounts: 1.2 million; 
Total accounts: 2.5 million. 

Year: 2002; 
College savings plan accounts: 2.9 million; 
Prepaid tuition accounts: 1.5 million; 
Total accounts: 4.4 million. 

Year: 2003; 
College savings plan accounts: 4.4 million; 
Prepaid tuition accounts: 1.7 million; 
Total accounts: 6.1 million. 

Year: 2004; 
College savings plan accounts: 5.3 million; 
Prepaid tuition accounts: 1.8 million; 
Total accounts: 7.1 million. 

Year: 2005; 
College savings plan accounts: 6.2 million; 
Prepaid tuition accounts: 2 million; 
Total accounts: 8.2 million. 

Year: 2006; 
College savings plan accounts: 7 million; 
Prepaid tuition accounts: 2.1 million; 
Total accounts: 9.1 million. 

Year: 2007; 
College savings plan accounts: 7.8 million; 
Prepaid tuition accounts: 2.2 million; 
Total accounts: 10.0 million. 

Year: 2008; 
College savings plan accounts: 8.6 million; 
Prepaid tuition accounts: 2.3 million; 
Total accounts: 10.9 million. 

Year: 2009; 
College savings plan accounts: 9.1 million; 
Prepaid tuition accounts: 2.5 million; 
Total accounts: 11.6 million. 

Year: 2010; 
College savings plan accounts: 9.5 million; 
Prepaid tuition accounts: N/A[A]. 

Year: 2011; 
College savings plan accounts: 9.9 million; 
Prepaid tuition accounts: N/A[A]. 

Source: GAO analysis of Financial Research Corporation data. 

[A] We did not report prepaid tuition account data for 2010 and 2011 
because the method of collecting these data changed in 2009. 

[End of figure] 

Federal Requirements for 529 Plans: 

529 plans are a state-sponsored investment or savings vehicle whose 
purpose is to encourage people to save for college.[Footnote 13] 
Contributions to 529 plans are made with after-tax dollars and are not 
deductible for federal tax purposes. Annual contributions in excess of 
$13,000 are generally subject to federal gift taxes.[Footnote 14] 
Total contributions may not exceed the amount necessary to provide for 
the qualified education expenses of the beneficiary, which is 
determined by each state; however, individuals may open 529 plan 
accounts in multiple states.[Footnote 15] Earnings on contributions 
grow tax-deferred. When a distribution is made from a 529 plan, the 
earnings portion is tax-exempt as long as it is used to pay for 
qualified education expenses.[Footnote 16] Taxpayers must report to 
the Internal Revenue Service (IRS) whether the distribution was for 
qualified higher education expenses. Distributions not used for 
qualified higher education expenses can be made to either the account 
owner or beneficiary, but the portion of the nonqualified distribution 
consisting of investment earnings is taxable and subject to an 
additional 10 percent penalty.[Footnote 17] The federal penalty does 
not apply in some circumstances, for example if the distribution was 
considered nonqualified because the beneficiary died or received a 
scholarship. 

While section 529 provides that account owners and beneficiaries may 
not directly or indirectly control how contributions or earnings are 
invested, in 2001, IRS issued a notice setting out a rule permitting a 
change in investment strategy once per year and upon a change in the 
designated beneficiary of the account.[Footnote 18] For 2009 only, 
this was increased to twice per year.[Footnote 19] 

There are few federal restrictions on 529 plan participation. For 
example, there are no income limits and almost anyone can initially be 
named as a beneficiary--an individual may open a 529 plan account for 
a child, grandchild, friend, spouse, or for themselves. Further, the 
529 plan account owner may change the beneficiary at any time, though 
the subsequent beneficiary must be a member of the family of the 
original beneficiary in order for this change to be tax-exempt. 
[Footnote 20] 

529 Plan Operation and Features: 

Because 529 plans are state-sponsored investments, states determine 
whether and what type of plans to offer (i.e., prepaid tuition or 
savings) as well as the eligibility criteria (for example, at the time 
of application prepaid tuition plans may require either the account 
owner or beneficiary to be a resident of the state administering the 
plan whereas residents and nonresidents can invest in most states' 
college savings plans); administrative and investment fees; and 
associated state tax benefits. Almost all states offer a college 
savings plan.[Footnote 21] In these plans, individuals purchase 
interests or shares in a trust established by the state. In most 
cases, the trust assets are invested in mutual funds. The shares in 
college savings plans can be sold directly by the state or through an 
external program manager hired by the state (direct-sold) as well as 
through a financial advisor or broker (advisor-sold). College savings 
plans may offer a number of investment options, which often include 
stock mutual funds, bond mutual funds, and money market funds. These 
investment options can vary in terms of risk and return, ranging, for 
example, from investments that are insured by the Federal Deposit 
Insurance Corporation (FDIC) to options that are almost completely 
invested in aggressive-growth funds. Many plans offer age-based 
portfolios that shift automatically into more conservative investments 
as the beneficiary approaches college age. Fifteen states also offer 
prepaid tuition plans to their state residents.[Footnote 22] To help 
run their plans, states may employ marketing staff, advisors, 
financial consultants, or other experts. 

Some states offer a variety of tax advantages that can include a state 
deduction or non-refundable credit for plan contributions and tax-
deferred earnings.[Footnote 23] These benefits may apply only to 
residents who make contributions to their own state's plan or, in a 
few states, may include contributions made to other states' plans. 
[Footnote 24] 

Plan Disclosures: 

Although most 529 college savings plans have been modeled after mutual 
funds, 529 plans are regulated differently than mutual funds under the 
federal securities laws because they are regulated as municipal 
securities.[Footnote 25] As municipal securities, 529 plans are exempt 
from the registration and reporting requirements of the federal 
securities laws.[Footnote 26] However, broker-dealers selling 529 
plans (advisor-sold plans) must comply with the rules of the Municipal 
Securities Rulemaking Board (MSRB).[Footnote 27] Specifically, MSRB 
requires broker-dealers who sell 529 plans to follow certain 
guidelines, such as having reasonable grounds to believe that the 
recommended product is suitable for the customer; disclosing certain 
information, such as plan fees and state tax implications; following 
certain requirements when advertising; and posting disclosure 
documents on its Electronic Municipal Market Access Website.[Footnote 
28] However, MSRB rules do not apply to state issuers when they market 
their 529 plans directly to the investor without the assistance of a 
broker-dealer (direct-sold plans). In 2004, in response to concerns 
that 529 plan disclosures were inadequate, CSPN, after working with 
the Securities and Exchange Commission, the MSRB, and the National 
Association of Securities Dealers, developed voluntary disclosure 
principles to be adopted by state issuers on plan performance, fees, 
and state tax information, among other things. These principles were 
designed to enhance investors' ability to compare information across 
plans. Since 2004, the principles have been updated several times with 
the most recent update in May 2011. 

Student Financial Aid: 

As authorized under Title IV of the Higher Education Act of 1965, as 
amended, the Department of Education provides assistance to help 
millions of students and families meet the costs of higher education 
through grants, work-study, and loans. A substantial portion of this 
federal financial aid is awarded based on the amount of a student's 
financial need, which is generally the difference between a student's 
cost of attendance and an estimate of his family's ability to pay 
these costs, known as the expected family contribution (EFC). In 
addition to the student's income and assets, parents' income and 
assets are also used to determine the student's EFC unless the student 
is classified as independent. Independent students have their income 
and assets included in the EFC and their spouses' income and assets, 
if applicable. Several criteria are used to determine if a student is 
independent, such as the student's age, and if he or she is married or 
separated, enrolled in a master's or doctoral degree program, or 
serving on active duty in the military, among other things. 

To apply for federal financial aid, students and, in the case of 
dependent students, parents submit information on income, assets, and 
the number of children enrolled in college through the Free 
Application for Federal Student Aid (FAFSA). This information is then 
used to determine the student's eligibility for federal student aid by 
calculating the EFC through a process known as federal methodology, 
which is set out in statute.[Footnote 29] In terms of assets, figure 3 
shows the information required[Footnote 30] by the FAFSA regarding the 
net worth of students' and parents' investments, which includes 
savings in 529 plans along with other investments such as Coverdells, 
money market funds, stocks, and mutual funds (for a full copy of the 
FAFSA see appendix II).[Footnote 31] 

Figure 3: FAFSA Questions on Student and Parent Assets, Including 529 
Plans: 

[Refer to PDF for image: form illustration] 

Highlighted in the illustration: 

Student's contribution (page 4): 
41. As of today, what is the net worth of your (and spouse's) 
investments..... 

Parents' contribution (page 7): 
89. As of today, what is the net worth of your parents' 
investments..... 

Notes (page 2): 
Notes for questions 41 and 42 (page 4) and 89 and 90 (page 7): 
Investments also include qualified educational benefits or education 
savings accounts (e.g., Coverdell savings accounts, 529 college 
savings plans, and the refund value of 529 prepaid tuition plans). 

Source: GAO excerpt from the Free Application for Federal Student Aid, 
July 2, 2012 - July 30, 2013. 

[End of figure] 

States and institutions may also offer financial aid. To determine the 
amount of such aid, some states and institutions choose to gather 
information in addition to what is required by the FAFSA. One form 
used by some institutions is the College Board's PROFILE form. The 
PROFILE asks for information not included on the FAFSA, such as home 
equity and medical expenses, as well as more detail about information 
that is included on the FAFSA. The institutions may then use an 
individualized institutional methodology to determine the student's 
EFC for institutional financial aid.[Footnote 32] 

Few Families Have 529 Plans and Those Who Do Tend to Be Wealthier: 

A Small Percentage of Families Have 529 Plans: 

According to the 2010 Survey of Consumer Finances (SCF), less than 3 
percent of U.S. families had 529 plans[Footnote 33] or Coverdells, a 
similar but less often used education savings account.[Footnote 34] 
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. Similarly, 
of the approximately 18 percent of families who reported saving for 
education was a priority, only about 9 percent had 529 plans or 
Coverdells. 529 plans are also less commonly used than other savings 
vehicles among those saving for college.[Footnote 35] For example, a 
2010 Sallie Mae survey found that most parents saved for college in 
general savings accounts or certificates of deposit and, of those who 
did invest, more used general investment vehicles than 529 plans. 
[Footnote 36] Based on our analysis of SCF data, the median amount in 
529 plan or Coverdell accounts was about $14,700.[Footnote 37] 

Families with 529 Plans Generally Have More Wealth and Education than 
Those without 529 Plans: 

Families with 529 plans or Coverdells typically had much more wealth 
than families without these accounts, according to our analysis of SCF 
data. Based on our analysis of the 2010 SCF, we estimate that the 
median financial asset[Footnote 38] value for families with 529 plans 
or Coverdells was about $413,500, which is about twenty-five times the 
median financial asset value for families without 529 plans or 
Coverdells (about $15,400).[Footnote 39] For example, families with 
529 plans or Coverdells had more retirement assets than other 
families. Of families with 529 plans or Coverdells, about 94 percent 
had retirement assets,[Footnote 40] such as those in 401(k) accounts 
or traditional pensions.[Footnote 41] In contrast, approximately 49 
percent of families without 529 plans or Coverdells had these 
retirement assets. Further, the median value of retirement assets was 
much greater for those with 529 plans or Coverdells. Specifically, the 
median value in retirement accounts was about $213,600 for families 
with 529 plans or Coverdells, while the median value for families 
without 529 plans or Coverdells was about $40,300.[Footnote 42] A 
larger share of families with 529 plans or Coverdells (27 percent) 
also believed they will have more than enough retirement income from 
pensions and Social Security to maintain current living standards than 
the share of families without 529 plans or Coverdells (16 percent), 
which may put them in a better position to save for college.[Footnote 
43] 

Further, the median income of families with 529 plans or Coverdells 
was about three times the median income of families without these 
accounts.[Footnote 44] Specifically, families with 529 plans or 
Coverdells had median incomes of about $142,400 per year compared to 
$45,100 for other families.[Footnote 45] 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 
(see figure 4).[Footnote 46] In 2009, Treasury reported that 
participation in 529 plans is likely to increase with income, in part, 
because the tax benefits and overall savings rates increase with 
income.[Footnote 47] (For more information see text box on 529 plan 
savings, below). 

Figure 4: Distribution of Income for Families with and without 529 
Plans or Coverdells (from SCF): 

Figure 4: Distribution of Income for Families with and without 529 
Plans or Coverdells (from SCF): 

[Refer to PDF for image: horizontal bar graph] 

Total income: $1 to $100,000: 
Families with 529 plans or Coverdells: 30%; 
Families without 529 plans or Coverdells: 82%; 

Total income: $100,001 to $150,000: 
Families with 529 plans or Coverdells: 24%; 
Families without 529 plans or Coverdells: 9%; 

More than $150,000: 
Families with 529 plans or Coverdells: 47%; 
Families without 529 plans or Coverdells: 8%; 

Source: GAO analysis of SCF 2010 data. 

Notes: Numbers may not add to 100 percent due to rounding. Error bars 
in the graph display the 95 percent confidence intervals for these 
estimates. We are 95 percent confident that the percentage of families 
with 529 plans or Coverdells who have incomes of $1 to $100,000 was 
between 21.9 and 37.1 percent, that those who have incomes of $100,001 
to $150,000 was between 17.4 and 29.8 percent, and that those who have 
incomes over $150,000 was between 38.8 and 54.4 percent. We are 95 
percent confident that the percentage of families without 529 plans or 
Coverdells who have incomes of $1 to $100,000 was between 81.5 and 
83.3 percent, that those who have incomes of $100,001 to $150,000 was 
between 8.3 and 9.7 percent, and that those who have incomes over 
$150,000 was between 7.6 and 8.6 percent. 

[End of figure] 

[Text box: 529 Plan Federal Tax Savings]: 

Using IRS taxpayer data and a microsimulation model from the National 
Bureau of Economic Research (NBER), we found that taxpayers with higher 
incomes both took larger distributions from 529 plans and received a 
larger tax benefit from those distributions (see table below). As we 
reported in 2012, 529 plan tax incentives are more beneficial to 
families with higher tax liabilities, in part, because these families 
have a higher marginal tax rate (see GAO-12-560). 

Table: Distributions and Estimated Federal Tax Savings of 529 Plans in 
2010 by Income: 

Total income: $1 to $100,000; 
Median distribution: $7,491; 
Median tax savings: $561. 

Total income: $100,001 to $150,000; 
Median distribution: $13,394; 
Median tax savings: $1,958. 

Total income: Over $150,000; 
Median distribution: $18,039; 
Median tax savings: $3,132. 

Source: GAO analysis of IRS SOI 2010 data using NBER's TAXSIM Model, a 
microsimulation model. 

[End of table] 

Notes: We are 95 percent confident that in 2010: the median 
distribution was between $6,261 and $8,280 and the median tax savings 
was between $493 and $664 for taxpayers whose total income was between 
$1 and $100,000; the median distribution was between $10,327 and 
$16,110 and the median tax savings was between $1,587 and $2,456 for 
taxpayers whose total income was between $100,001 and $150,000; and the 
median distribution was between $16,280 and $20,107 and the median tax 
savings was between $2,858 and $3,415 for taxpayers whose total income 
was more than $150,000.
[End of text box] 

As higher-income families tend to have higher levels of education, it 
is logical that the wealthier families who save in 529 plans or 
Coverdells also have higher educational attainment than other 
families. Specifically, about 91 percent of SCF respondents with 529 
plans or Coverdells indicated that either they or their spouse/partner 
had at least a college degree, compared to about 44 percent of 
families without these accounts. Further, because families with 529 
plans have higher education levels, children in these families may be 
more likely to attend college in the first place as research shows 
that when parents have obtained a college degree, their children are 
more likely to attend college.[Footnote 48] 

Also, a larger proportion of respondents in families who had 529 plans 
or Coverdells were non-minorities, according to our analysis of SCF 
data.[Footnote 49] Specifically, about 84 percent of respondents whose 
families had 529 plans or Coverdells identified as white (non-
Hispanic).[Footnote 50] In contrast, about 69 percent of respondents 
in families without these accounts said they were white (non-
Hispanic). Moreover, only 5 percent of respondents in families with 
529 plans or Coverdells identified as Black/African-American, compared 
to 14 percent without these accounts. While SCF does not provide 
insight on why more white families use 529 plans than others, a 2010 
Sallie Mae study found that a larger percentage of white parents saved 
for college in general when compared to African-American and Hispanic 
parents. Further, the study found that white families save more for 
college even when controlling for income. 

To determine how the characteristics of families with 529 plans relate 
to families who already have students in college, we reviewed 
characteristics of college students' families using data from the 2007-
2008 NPSAS.[Footnote 51] While families with 529 plans are not 
directly comparable to families of college students,[Footnote 52] we 
developed profiles of these two groups to understand the broad trends 
and found several differences. When compared to families with students 
already in college, families with 529 plans or Coverdells still tended 
to have higher income and more education (see table 1).[Footnote 53] 
This tendency persisted even when examining the median incomes of 
dependent and independent students separately. Specifically, median 
parental income for dependent students was slightly more than half the 
median income of families with 529 plans or Coverdells, and 
independent students had slightly more than one-quarter of the median 
income of those with 529 plans or Coverdells. 

Table 1: Estimates of Selected Characteristics of College Students' 
Families (from NPSAS) and Families with and without 529 Plans (from 
SCF): 

Characteristic: Median income[A]; 
College students' families (from NPSAS): $47,747; 
All Families (from SCF): 
Families with 529 plans or Coverdells: $142,400; 
Families without 529 plans or Coverdells: $45,100. 

Characteristic: Percent with at least a college degree[B]; 
College students' families (from NPSAS): 42%; 
All Families (from SCF): 
Families with 529 plans or Coverdells: 91%; 
Families without 529 plans or Coverdells: 44%. 

Characteristic: Percent white (non-Hispanic)[C]; 
College students' families (from NPSAS): 62%; 
All Families (from SCF): 
Families with 529 plans or Coverdells: 84%; 
Families without 529 plans or Coverdells: 69%. 

Source: GAO analysis of NPSAS 2007-2008 and SCF 2010 data. 

Notes: All amounts are in 2010 dollars. Unless otherwise noted, 
percentage estimates have 95 percent confidence intervals within 5 
percentage points of the estimate, and median income estimates have 95 
percent confidence intervals within 5 percent of the estimate itself. 

[A] For college students' families, this is the students' parents' 
income (for dependent students) or the students' income including their 
spouses' if married (for independent students). For "all families", 
this is the total household income. We are 95 percent confident that 
the median income for families with 529 plans or Coverdells was between 
$125,400 and $159,400. 

[B] For college students' families, this is the percentage of students 
who had at least one parent with a college degree. For "all families", 
this is the percentage of families in which the respondent or his/her 
spouse or partner had at least a college degree. 

[C] For college students' families, this is the percentage of students 
with this race/ethnicity. For "all families", this is the percentage of 
families for which the respondent had this race/ethnicity. We are 95 
percent confident that the percentage of respondents whose families had 
529 plans or Coverdells who identified as white (non-Hispanic) was 
between 78.2 and 88.8 percent. 

[End of table] 

For additional information on 529 plan distributions, see text box 
below. 

[Text box: 529 Plan Distributions]: 

In 2010, more than 1 million taxpayers reported taking approximately 
$23.8 billion in distributions from 529 plans, which they generally 
reported using for qualified education expenses. Our review of IRS data 
found that about 5 percent of taxpayers who took distributions from a 
529 plan reported that a portion of their 529 plan distributions were 
nonqualified and subject to a penalty. See table below for additional 
data. 

2010: 

Number of taxpayers taking distributions from 529 plans: 
2007: 0.82 million; 
2008: 0.97 million; 
2009: 1.07 million; 
2010: 1.08 million. 

Total amount of distributions from 529 plans (in billions of 2010 
dollars: 
2007: $8.5 billion; 
2008: $19.1 billion; 
2009: $20.5 billion; 
2010: $23.8 billion. 

Percent of taxpayers for which some portion of the 529 plan 
distribution was reported as nonqualified and subject to a penalty; 
2007: 7.8%; 
2008: 6.7%; 
2009: 6%; 
2010: 5.3%. 

Source: GAO analysis of IRS SOI 2007-2010 data. 

[End of table] 

Notes: We are 95 percent confident that the number of taxpayers who 
reported taking distributions from 529 plans was between 772,000 and 
867,000 in 2007, between 916,000 and 1,019,000 in 2008, between 
1,012,000 and 1,127,000 in 2009, and between 1,023,000 and 1,135,000 in 
2010. We are 95 percent confident that the total amount of 529 plan 
distributions (in 2010 dollars) was between $7.8 and $9.2 billion in 
2007, between $17.7 and $20.5 billion in 2008, between $18.9 and $22.2 
billion in 2009, and between $21.2 and $26.4 billion in 2010. 
[End of text box] 

States' 529 Plan Features and Other Factors Can Affect Participation: 

Tax Benefits, Fees, and Investment Options Vary Across State 529 Plans: 

Officials in every state and most experts and representatives we 
interviewed identified tax benefits, fees, and investment options as 
some of the most important features consumers consider when choosing 
whether or not to participate in a 529 plan and, if so, which plan to 
choose. These features vary by state and plan.[Footnote 54] All states 
offer at least one plan and many offer a combination of college 
savings (either direct-sold, advisor-sold, or both) and prepaid plans. 
For example, 14 states offer a direct-sold plan only, 22 states offer 
both direct-sold and advisor-sold plans, and 6 states offer all three 
plan types: direct-sold, advisor-sold, and prepaid. The popularity of 
direct-sold college savings plans has grown over time and in 2011 
total assets were essentially evenly split between those and advisor-
sold plans. 

State Tax Benefits: 

States offer a range of tax benefits for 529 plans, and these benefits 
are a primary incentive to investing in a 529 plan, according to many 
state officials we interviewed. In addition to earnings growing tax-
deferred, our analysis of CSPN data shows the majority of states with 
an income tax offer some form of benefits: 33 offer a tax deduction 
and 3 offer a nonrefundable tax credit to residents who participate in 
their state's plan.[Footnote 55] Five states also extend benefits to 
residents who participate in any state's plan. Almost all states limit 
tax benefits to the account owners, but one state extends those 
benefits to grandparents, aunts, and uncles who contribute to the 
plan. Officials in some states we interviewed said they provide 
additional tax benefits, for example, one state offers an exemption 
from the state inheritance tax. Others allow contribution amounts that 
exceed the annual deduction limit to be carried over to the following 
year's return.[Footnote 56] 

Fees: 

Various fees and expenses may be associated with 529 plans, including 
administrative and investment fees. Administrative fees, which are 
charged by the state and/or the program manager hired by the state, 
cover administration of the 529 program, including customer service 
and marketing. Investment fees are charged by the investment company 
to manage the funds. The aggregate of these administrative and 
investment fees is often referred to as "annual asset-based fees," 
which are expressed as a percentage of the fund's average net assets. 
In addition, advisor-sold plans may also charge a "sales load"--that 
is, a fee paid to the selling broker when the fund is purchased or 
redeemed--and direct-sold and advisor-sold plans may also charge 
participants additional fees for services such as enrolling or 
changing the account owner. 

Fees among 529 plans vary widely; total annual asset-based fees among 
plans nationwide ranged from 0 percent to 1.97 percent for direct-sold 
plans and 0 percent to 2.78 percent for advisor-sold plans, as of July 
2012. As seen in table 2, there is variation among states in both 
administrative and investment fees. Such variation occurred even among 
states with similar administrative structures. For example, among 
three of the states we reviewed where most administrative functions 
were conducted in-house, one state charged administrative fees of 
between 0.44 percent and 0.46 percent of the balance annually, another 
charged between 0.15 percent and 0.20 percent, and a third charged no 
administrative fees, instead covering operational costs and salaries 
through an annual state appropriation.[Footnote 57] Investment fees 
also varied: for example, underlying mutual fund fees ranged from 0 
percent to 1.82 percent of the balance annually, depending on the type 
of investment option a participant chooses. For advisor-sold funds, 
sales loads also varied, ranging from 0 percent to 5.75 percent, 
[Footnote 58] in part based on the fund class.[Footnote 59] In 
addition, among the five states we reviewed, four did not charge an 
enrollment or application fee, while one charged $25, although the fee 
may be waived through promotions to encourage participation. 

Table 2: Fee Ranges (Percent) for College Savings Plans, Direct-Sold 
and Advisor-Sold: 

Administrative Fees: 

Fee: State Fee; 
Description: Fees charged by the state for operational costs; 
Range for Direct-Sold Plans: 0 to 0.75%; 
Range for Advisor-sold Plans: 0 to 0.15%. 

Fee: Program Manager Fee; 
Description: Fee charged by program manager for administering the plan; 
Range for Direct-Sold Plans: 0 to 0.8%; 
Range for Advisor-sold Plans: 0 to 1.15%. 

Investment Fees: 

Fee: Underlying Fund Expense; 
Description: Expenses or fees charged by an investment firm for 
managing the funds in the plans; 
Range for Direct-Sold Plans: 0 to 1.82%; 
Range for Advisor-sold Plans (in percent): 0 to 1.82%. 

Fee: Distribution Fee; 
Description: Fee charged in advisor-sold plans provided to brokers who 
sold the fund shares; 
Range for Direct-Sold Plans: [Empty]; 
Range for Advisor-sold Plans: 0 to 1.0%. 

Fee: Miscellaneous Fees; 
Range for Direct-Sold Plans: 0 to 0.77%; 
Range for Advisor-sold Plans: 0 to 0.5%. 

Source: GAO analysis of CSPN data as of July 2012. 

Note: In addition to the fees listed above, plans may also charge 
application, cancellation, change in beneficiary, change in investment 
options, or other fees. 

[End of table] 

529 plan fees remain higher than fees for similar mutual funds an 
investor might purchase outside of a 529 plan. According to a 2011 
study by Morningstar, 529 plan mutual funds charged, on average, an 
additional 0.31 percent of the account balance annually in investment 
fees compared with their respective mutual fund categories in the open 
market.[Footnote 60] The administrative fees charged by most 529 funds 
raise the cost even higher. However, Morningstar does note that fees 
for 529 plans have declined in recent years and officials at the 
majority of state plans we interviewed told us they have taken steps 
to reduce fees - for example, by renegotiating program manager 
contracts, using competitive bidding for program management, or 
consolidating functions in-house rather than using a program manager. 
As we have previously reported, fees are one of many factors 
participants should consider when investing because even a small fee 
increase can significantly decrease savings over time.[Footnote 61] 

Investment Options: 

State plans offer a variety of investment options to 529 college 
savings plan participants.[Footnote 62] Plans in the states we 
reviewed, for example, include up to 17 different investment options, 
including age-based, static, and customized portfolios, to cater to 
participants' various levels of risk tolerance and investment 
sophistication. Age-based options were generally the most popular and, 
according to state officials we interviewed, may appeal to investors 
who might have more limited investment experience or a lower risk 
tolerance. One state plan we reviewed also offers a customized option 
for participants who seek more control over their investments, which 
allows them to designate their own allocations in funds such as stocks 
and bonds. For more risk-averse participants, some states also offer a 
FDIC-insured investment option or one that in some other way 
guarantees the investment's principal.[Footnote 63] To help investors 
determine which plan best meets their needs, officials we interviewed 
in two states said their states provide risk assessment information 
through customer call centers.[Footnote 64] One state developed a risk 
tolerance questionnaire to explain investment scenarios, while the 
other had a representative ask informal questions to help potential 
investors assess their own risk level. 

Families can also choose to invest in prepaid plans, which were 
offered in three of the five states we reviewed. These plans also vary 
in fees, payment options, and cost. Two plans, for example, charged an 
annual administrative fee of just under 0.50 percent and the third 
charged no annual fee. In terms of payment options and costs, two 
states we interviewed offered prepaid plans by academic periods or 
units that can be used to pay for future tuition costs with the option 
of paying in lump sum or through a monthly payment program. According 
to state officials, the cost of these prepaid plans is generally 
determined by forecasting future tuition and fees at different types 
of schools (4-year, community college, etc.), given a number of 
actuarial assumptions on tuition inflation and anticipated investment 
return. One state, for example, offered a contract to cover four years 
of college costs for a child currently under age five at a lump sum of 
$56,600 and another state offered a similar contract for just under 
$66,500. A third state we reviewed does not offer units or contracts, 
but allows participants to contribute any amount to the plan. When the 
participant withdraws the funds for qualified educational expenses, 
they will receive the amount they contributed adjusted by a tuition 
inflation value. 

Participation is Affected by Ability to Save and Other Factors, but 
Some States Have Adopted Strategies to Address Barriers: 

Families encounter a number of barriers as they consider saving for 
college: they may struggle with making saving a priority, and for 
those who do plan to save, many do not know 529 plans exist as a 
savings option. Additionally, once families decide to invest in a 529 
plan they may have trouble understanding how it works and the 
variation across plans may affect their ability to select one that 
best meets their needs (see figure 5). 

Figure 5: Factors that Affect 529 Plan Participation: 

[Refer to PDF for image: illustration] 

Ability to save: 
Families often don't save for college because they: 
* Feel they don't have enough income or resources to save.
* Underestimate the true cost of college and often put off saving.
* Have misconceptions about how much financial aid will be available. 

Awareness that 529s are a savings option: 
Families who want to save sometimes don't know how 529s can help them: 
* Of parents saving for college, nearly half are unfamiliar with the 
plans.
* Some families are unaware they can invest in any state plan or use 
the funds at any college. 

State variation, tax benefits, and a limit on investment changes: 
Even families who want to use a 529 plan face: 
* Confusion from a large number of plans, each with different costs 
and investment options.
* Unrealized tax benefits for some lower-income families.
* A limit to changing investment options to once per year. 

Source: GAO analysis based on reports and interviews with 529 plan 
officials and experts. 

[End of figure] 

Ability to Save: 

Families may encounter a variety of barriers saving for college, such 
as insufficient income, underestimating the cost of college, and 
misconceptions about financial aid availability, but selected states 
are taking steps to help address these barriers. A 2010 national 
survey published by Sallie Mae found that while nearly nine out of ten 
parents expected their child would attend some form of higher 
education, only three out of five parents of college-bound children 
have saved or invested for their oldest child's education.[Footnote 65] 

First, many families may not save because they lack adequate income or 
have competing financial priorities. The same Sallie Mae survey 
reported that 68 percent of those who are not saving cited a lack of 
money as a major reason.[Footnote 66] State officials and some experts 
we interviewed also cited this as a challenge: for example, one state 
official said that the economic downturn has affected some families 
who are reluctant to make deposits or participate in a 529 plan 
because they may need to choose between paying their mortgage and 
saving for college. In terms of competing priorities, two industry 
representatives we interviewed stressed that retirement should be a 
higher priority than saving for college. Officials from one state 
added when a family's budget shrinks or the economy is uncertain, 
families reduce college rather than retirement savings. Furthermore, a 
few industry representatives said families should consider using other 
tax-deferred savings vehicles where funds could be used for multiple 
purposes, such as retirement and education. The states we selected to 
review have adopted strategies to expand participation among lower 
income families who may have limited resources to allocate towards 
savings, including offering matching programs, low minimum initial 
contributions, and less risky investment options. 

* Matching Programs: While a limited number of states offer such 
options, matching programs to expand low-income families' 
participation and increase contributions by incentivizing saving have 
increased this group's participation and college access, according to 
some state officials we interviewed. According to CSPN data, 14 states 
offer some form of matching program and two of the three states we 
reviewed specifically use matching programs to target low-income 
families. To qualify in one state, for example, a family must earn 
less than 200 percent of the federal poverty level[Footnote 67] and 
deposit a minimum of $100 during the participating calendar year. The 
state then matches contributions, dollar for dollar, up to $400 
annually per beneficiary for up to 4 years. In addition to increasing 
participation, officials from one state plan noted that the matching 
program can also help minimize student loans and reduce the amount 
students will have to work while in school. An ongoing experiment 
conducted by the Center for Social Development also found a positive 
impact on the number of 529 plan accounts for families who were 
automatically enrolled in a state-owned 529 account with a matching 
program in one state.[Footnote 68] In addition to participating in the 
automatically opened account, families in the treatment group were 
offered an additional $100 to open a private account. These families 
opened private 529 accounts at a higher rate (17 percent of families 
with a match compared to 2 percent of those in the control group 
without the incentives), and deposited more into those accounts. 
[Footnote 69] While matching programs may have positive results, two 
states we reviewed reported challenges with funding and awareness. One 
state's program had not been authorized since 2008 and officials in 
another state said their enrollment remained low despite being open to 
all participants because the state's 529 marketing budget was 
eliminated. 

* Low or No Minimum Initial Contributions: Low or no minimum initial 
contributions and fee waivers may also help increase participation 
among low-income families, according to state officials and others we 
interviewed. Nationally, minimum initial contributions range from $10 
to $5,000, according to our analysis of CSPN data; however, the 
majority of states require an initial contribution of $25 or less. Two 
states allow participants to open an account with any amount. 
Officials in one state reported that keeping the initial deposit 
amounts low can also help facilitate one of their main goals: to help 
spur the mental commitment and habit to save. 

* Less Risky Investment Options: Officials from many states we 
reviewed said they offer investment options that pose less risk to the 
investor, which can appeal to low-to moderate-income families. One 
state, for example, partnered with two local banks to provide a FDIC-
insured option to target families who might otherwise save in the 
bank's savings account. According to an official from the plan's 
banking partner, clients with more assets often use financial planners 
and are aware of 529 plans, while the FDIC-insured option was designed 
for those without financial planners and who use the bank's more 
traditional products. 

According to state officials, most of the states we reviewed are not 
tracking participant's demographic information such as income, 
however, making the success of these efforts for low-income families 
difficult to assess. 

Second, in addition to insufficient income, some families may not save 
because they procrastinate or underestimate the true cost of college, 
according to officials from most of the states we reviewed. Some 
parents may not budget money to save for college due to a lack of 
understanding about what college really costs or they become 
overwhelmed and do nothing, officials at one state 529 plan said. To 
address these challenges, selected state 529 plans have adopted 
financial literacy programs and marketing strategies emphasizing the 
importance of saving even a small amount early and often.[Footnote 70] 
To target families with younger children, two states provide materials 
to parents of newborns through the hospital or direct mail and two 
states work with elementary schools to distribute materials on the 
states' 529 plans. Some states also establish contribution deadlines 
linked to certain benefits, such as discounted enrollment, or provide 
incentives to families who contribute during certain times of the 
year. To prevent families from feeling overwhelmed about college 
costs, one state has focused its marketing on saving a small amount 
each month, $25, to help reduce the student's future debt, instead of 
focusing on the total cost of college. 

Third, parents may not save for college because they have 
misconceptions about financial aid availability, according to state 
officials and some higher education experts. Some noted that families 
may not understand that most students receive aid in the form of loans 
that will need to be repaid, rather than receiving grants or 
scholarships. According to a 2010 national study, 84 percent of non-
saving parents expect their child to qualify for enough scholarships 
or financial aid to cover the costs of college with 49 percent citing 
it as a major reason for not saving.[Footnote 71] However, according 
to our analysis of NPSAS data for all postsecondary students in the 
2007-2008 school year, only about half received grants with a median 
amount of $3,400 (in 2010 dollars). About 40 percent of students took 
out loans, with a median amount of about $6,800 (in 2010 dollars). 
Financial aid including grants and loans only covered 37 percent of a 
student's cost of attendance, with the median out-of-pocket expenses 
totaling about $7,000 per student (in 2010 dollars). Further, while 
many families hope to fund college through financial aid, one recent 
study found that 2011 levels of scholarships were unsustainable as 
colleges felt the impact of a difficult economic climate, constraints 
on endowments, and tighter budgets.[Footnote 72] In response, many of 
the states we reviewed have attempted to address misconceptions about 
the financial aid process. For example, one state lists common myths 
about 529 plans on its website, explaining that approximately 60 
percent of federal financial aid comes in the form of loans, a debt 
the family must repay. The site encourages families to save even in 
small amounts to offset the amount of debt the family will incur. 

Awareness of 529 Plans as a Savings Option: 

For those who are saving for college, awareness that 529 plans exist 
as a savings option is a challenge to participation, according to 
officials in most of the states we reviewed. In addition, among 
parents who are saving for college, one study found that almost half 
are unfamiliar with 529 plans. An additional 4 percent volunteered 
that they had never heard of the plan or did not know what it was. 
[Footnote 73] Families also learn about 529 plans through financial 
planners, according to many state officials we interviewed; therefore, 
awareness may be a particular challenge for low-income families who 
generally do not have access to such resources. Further, some state 
officials and industry representatives we interviewed encountered 
families with misperceptions about how 529 plans work, such as not 
understanding they can invest in plans outside their home state or use 
savings at any college or university. For example, officials from two 
states reported families mistakenly believe prepaid plans can only be 
used at an in-state institution.[Footnote 74] 

State Variation, Tax Implications, and a Limit on Investment Option 
Changes: 

While the high number of plans and variation in investment options and 
cost can offer consumers choice, families who ultimately decide to 
save with a 529 plan can find it difficult to compare plans, according 
to many state officials and experts. For example, the wide range of 
fee types can be difficult to understand and compare across plans 
because they are not consistent and it is difficult to compare asset-
based fees based on percentages with flat fees such as an annual fee 
in dollar amounts, according to one financial expert. Plan complexity 
can also make marketing and communication difficult, according to 
officials we interviewed in two states. Marketing officials from one 
state told us consumers requested more information on 529 plans, but 
it was difficult to communicate information about the complex plans in 
a simple, consumer-friendly way. Officials in another state noted that 
plan complexity and a lack of clear information can discourage 
families from researching and enrolling in a plan. 

Many state officials and some academic experts and industry 
representatives reported that simplifying the information available to 
consumers might keep families from feeling overwhelmed. Because MSRB 
rules do not apply to state issuers when they market their direct-sold 
529 plans, CSPN developed a set of disclosure principles to help 
states provide consistent information. The voluntary principles 
contain recommendations to help consumers understand plans and compare 
various features, such as fees, tax issues, and risk. While 
disclosures have been helpful, according to one expert who consults 
with a number of states, there is room for improvement: disclosures 
could be more rigorous in ensuring that consumers are informed of less-
costly options within a state if they exist and should cover 
information on prepaid plans, which is currently not standardized. 
When comparing direct-sold disclosure documents across states we 
reviewed, we found that the five states generally adhered to the CSPN 
disclosure principles and contained consistent information a consumer 
could compare. Three states, however, were missing some information 
that could be helpful to consumers, such as information on the risk of 
state tax law changes and a statement that 529 plans should only be 
used to save for qualified higher education expenses. 

The structure of federal and state tax benefits, a primary incentive 
for some 529 plan investors, can also affect participation as they may 
not be as helpful to low-income families, according to some academic 
experts, industry representatives, and state officials we interviewed. 
[Footnote 75] Low-income families with low or no tax liability see 
less benefit from federal tax benefits and may see no benefit from 
nonrefundable state tax credits provided to 529 plan investors. 
According to a 2009 Treasury report, families saving in 529 plans may 
need to carefully consider whether their child will go to college 
because the penalty incurred if the funds are not used for qualified 
education expenses may outweigh the tax benefits for low-income 
families.[Footnote 76] In addition, Treasury noted most states do not 
extend tax benefits to residents investing in out-of-state plans, 
limiting competition. As a result, families have a strong incentive to 
choose their home state plan even if other plans offer preferable 
investment choices. In 2009, Treasury recommended states eliminate 
this "home-state bias" to provide more investment options to 
consumers, more intense competition between plans, and potentially 
lower fees.[Footnote 77] According to an annual report from one state 
that extends its tax benefits to residents who invest in other states' 
plans, doing so, when other states do not, puts the home state plan at 
a competitive disadvantage. State officials explained that this policy 
results in other plans marketing their products in the state. 
Residents, therefore, may be unaware of their home state plan's 
benefits, according to the report. 

Finally, the fact that account holders may change their investment 
option only one time per year may affect participation in 529 plans, 
according to state officials and some industry representatives we 
interviewed. Officials from one financial services company advocated 
removing any limits on changing investment choices beyond those 
imposed by the financial services company sponsoring the fund, as is 
the case with 401(k) plans and individual retirement accounts. Another 
industry representative observed some 529 plan participants changing 
their account beneficiary solely because it would allow them to change 
their investment options. However, the representative cautioned that 
participants should not change their investment options too 
frequently; many experts advocate that investors are best served by 
sticking with a long-term investment plan. 

Savings in 529 Plans Affect Financial Aid the Same as Other Assets: 

Savings in 529 Plans Are Treated Similarly to Other Assets That Are 
Included When Calculating the Expected Family Contribution: 

The extent to which savings in 529 plans, or other investments, affect 
how much a family is expected to contribute to the cost of college--
the federal expected family contribution (EFC)--generally depends on 
the family's amount of assets. Education incorporates the amount of 
specific types of assets into various calculations to determine the 
EFC.[Footnote 78] However, in two calculations, families who meet 
certain criteria are either not expected to contribute to the cost of 
college (automatic zero EFC) or they qualify for a simplified 
calculation.[Footnote 79] In both cases, assets, including savings in 
529 plans, are not included in the calculation of the EFC. According 
to the 2007-2008 NPSAS, about a quarter of families who filed FAFSAs 
met these criteria. 

In other calculations, assets, including savings in 529 plans, may 
affect the EFC to different extents depending on whether students are 
dependent on their parents or are independent with dependents of their 
own. For dependent students, between 2.64 percent and 5.64 percent of 
parental assets may be included in the EFC as described below: 

* First, the parents report the net worth (current value minus debt) 
of their investments (see figure 6 #1),[Footnote 80] but before the 
total contribution from assets is calculated, an amount known as the 
"education savings and asset protection allowance" is subtracted (see 
figure 6, #2). This allowance is designed to help protect a portion of 
the parents' assets.[Footnote 81] 

* Second, 12 percent of any parental asset amount that exceeds the 
education savings and asset protection allowance is used to determine 
the contribution from assets that will be considered in the final EFC 
calculation (see figure 6 #3). 

* Third, this contribution from assets is added to the parents' 
available income to determine their adjusted available income (see 
figure 6, #4). 

* Fourth, a marginal rate, from 22 percent up to a maximum of 47 
percent, is applied to the sum of the parents' available income and 
contributions from assets (known collectively as the adjusted 
available income) to determine their EFC (see figure 6, #5). As a 
result, the amount of net parental assets, including savings in 529 
plans, that can be included in the EFC ranges from 2.64 percent to 
5.64 percent.[Footnote 82] 

Figure 6: Expected Family Contribution from Parents' Assets for 
Dependent Student: 

[Refer to PDF for image: illustration] 

EFC formula workbook (page 9): 

Parents Contribution from Assets: 

1. Net worth of investments** (FAFSA/SAR #89); If negative, enter zero: 
Net worth of parental investments are reported. 

2. Education savings and asset protection allowance (Table A5): 
Education savings and asset protection allowance is subtracted. 

3. Asset conversion rate: 
All parental assets, including savings in 529 plans, are initially 
assessed at a rate of 12 percent. 

Parents' Contribution: 

4. Adjusted Available Income (AAI); May be a negative number: 
This contribution from assets is added to the available income to 
determine the adjusted available income. 

5. Total parents' contribution from AAI (Calculate using Table A6.) If 
negative, enter zero: 
A marginal rate, from 22 percent to 47 percent, is applied to the 
adjusted available income to determine the parents' contribution. 
Thus, the amount of parents' assets that can be assessed in their 
expected family contribution ranges from 2.64 percent to 5.64 percent. 

Source: GAO analysis of Education's The EFC Formula, 2012-2013. 

[End of figure] 

Even if the dependent student is the 529 plan account owner, the 
savings are still assessed at the parents' asset rate. The EFC 
includes 20 percent of the value of a dependent student's assets; 
however, savings in a 529 plan where the student is the account owner 
are still considered assets of the dependent student's parent(s). 

Independent students can have up to 20 percent of their 529 plans 
savings and other assets included in their EFC. However, assets of 
independent students with dependents (other than a spouse) may be 
assessed at a lower rate. After an asset protection allowance is 
subtracted from their net assets, any remainder is multiplied by 7 
percent. Then, a marginal rate, from 22 percent to 47 percent, is 
applied to the sum of their available income and contribution from 
assets--similar to the process used for parental assets of dependents 
students. Therefore, from 1.54 percent to 3.29 percent of assets may 
be included in their EFC. In contrast, independent students who do not 
have dependents (other than a spouse) will have 20 percent of any 
assets exceeding the asset protection allowance included in their EFC. 
Education officials said independent students without children to 
support are generally expected to contribute a higher percentage of 
their assets because their primary focus should be on paying for their 
education. 

Distributions from 529 plans owned by parents and/or the student will 
not be considered as income in the EFC calculation in future years if 
they are used for qualified education expenses. However, if a student 
receives 529 plan distributions from an account owned by someone other 
than himself or the custodial parent, those funds count as student 
income and could affect the EFC in subsequent years.[Footnote 83] For 
example, if a student received funds from a 529 plan owned by a 
grandparent, he would have to report those funds as untaxed student 
income on the next year's FAFSA, according to Education officials (see 
figure 7). 

Figure 7: FAFSA Questions on Student Untaxed Income: 

[Refer to PDF for image: illustration] 

Student's financial information (page 5): 

Line 44j is where students report as untaxed income any distributions 
that did not come from either their own or their parents' 529 plan: 
j. Money received, or paid on your behalf (e.g., bills), not reported 
elsewhere on this form. 

Source: GAO excerpt from the Free Application for Federal Student Aid, 
July 1, 2012 — June 30, 2013. 

[End of figure] 

A small percentage of families who applied for federal financial aid 
in 2007-2008 had enough assets to be included in the determination of 
their EFC. In our analysis of families who filled out the FAFSA, we 
found that 13 percent of all students--24 percent of dependent 
students and 4 percent of independent students--had enough assets to 
be included in their EFC.[Footnote 84] In other words, the net worth 
of their (and possibly their parents' or spouses') assets exceeded the 
savings and asset protection allowance and was included in the EFC at 
some percentage. Education officials said that because the asset 
protection allowance is high, federal student aid decisions do not 
heavily rely on assets, such as savings in 529 plans. Officials told 
us that while home equity was removed from the list of assets used to 
calculate the EFC in 1992, the asset protection allowance remained the 
same. Since then, they said, assets have been a less relevant factor 
in calculating the EFC. 

Many States and Selected Institutions Also Treat 529 Plan Savings As 
Assets: 

States: 

Most state financial aid offices also consider savings in 529 plans as 
assets.[Footnote 85] According to the 2009-2010 National Association 
of State Student Grant and Aid Programs survey,[Footnote 86] 35 states 
reported that they used the federal methodology for determining the 
EFC for state aid.[Footnote 87] However, some states that reported 
using federal methodology for their primary student needs analysis 
also indicated they provide special treatment for state 529 college 
savings or prepaid plans when determining student eligibility for aid. 
Specifically, seven states that used federal methodology to award 
their state aid excluded the state's 529 college savings plan and 
three excluded the state's prepaid plan from their calculation for 
state aid. 

Of the officials in the six state financial aid offices we 
interviewed, none said they considered assets to a greater extent than 
the FAFSA and a few said their state took specific steps to exempt 
savings in these plans from consideration. Specifically, officials in 
two states said there is language in their 529 plan authorizing 
legislation that exempts plan savings when determining a student's 
eligibility for state financial aid. Officials in another state said 
their state issued a regulation stating that savings in a 529 plan 
would not affect state grant eligibility for residents attending 
nonprofit higher education institutions. An official in a fourth state 
said the legislature changed its higher education authorization 
language so that students would still be eligible to receive a state 
scholarship even if they enrolled in the state's prepaid plan. 

Institutions: 

Institutional financial aid practices vary with regard to assets, but 
those with more aid to award may gather additional information about a 
family's financial status, according to some representatives of 
national financial aid organizations and institutional officials we 
interviewed.[Footnote 88] Some schools require students to provide 
information in addition to the FAFSA, such as filling out the College 
Board's PROFILE form or submitting tax returns. One official said the 
PROFILE provides more detailed information on a family's assets, such 
as home equity and retirement account balances, which helps the 
university prioritize the students with the most need. 

Institutional officials we interviewed said their schools considered 
savings in 529 plans as assets, even if they used different 
methodologies to calculate their financial aid or included the assets 
at different percentages. Officials at two institutions said they did 
not consider savings in 529 plans beyond how they are already reported 
by the family on the FAFSA. An official at a third institution said 
the school does not collect any additional information on savings in 
529 plans beyond what is requested on the FAFSA even though the school 
requires families to fill out the PROFILE form and uses an 
institutional methodology to award its financial aid. The remaining 
institutional officials said they collect additional family financial 
information when calculating student aid, but consider savings in 529 
plans similarly to the family's other assets. Specifically, one 
institutional official said her school uses the PROFILE form to gather 
more detailed information about a family's financial situation. Even 
so, 529 plan savings do not affect a student's need any differently 
than other assets, she said, which are assessed by the institution at 
about five percent of their value. Additionally, she said 529 plan 
assets are considered parental assets even if they are reported as 
student assets because the school assesses parental assets at a lower 
percentage. An official at another institution said her school 
assesses assets at around 20 percent of their value when calculating 
the EFC for institutional aid. 

Officials' opinions varied on whether savings in 529 plans should 
affect financial aid, but many said families' concerns that these 
savings will have an adverse effect are common. One state financial 
aid official said it would be helpful if 529 plan savings were 
excluded entirely from the calculation because including them can be a 
deterrent to saving. She said her office often encounters families who 
feel penalized for saving because they believe the students without 
savings receive financial aid. Likewise, a 529 plan official said 
regardless of whether the student's financial aid will be reduced by 
savings in a 529 plan, there is the perception that it will. In 
contrast, one institutional financial aid official said savings in 529 
plans should not be treated any differently than other assets because 
the need analysis is meant to determine the family's fair share of 
college expenses and excluding 529 plans would be counter to this aim. 
One researcher we interviewed found that the issue may be most 
important for those families who are on the margin of receiving 
federal financial aid. Regardless of the perceived effect 529 plan 
savings may have on financial aid, some of the officials we 
interviewed said they encourage families to save for college because 
much of the aid they may be offered could be in the form of loans, so 
saving will generally be in the student's long-term financial interest. 

Concluding Observations: 

As currently designed, 529 college savings plans benefit a small 
percentage of U.S. families. In general these families tend to be 
wealthier than others. It is not clear whether the $1.6 billion in 
federal tax expenditures that these plans represent strategically 
targets limited federal resources. Although 529 plans do help some 
families save for college, families with less income and who are 
uncertain about whether their children will attend college may have 
less incentive to invest resources in 529 plans than in other forms of 
savings. In addition, the tax benefits attractive to a higher-income 
family do not offer as much benefit to a family with lower tax 
liability. 

Questions about who benefits from this tax expenditure occur in an 
environment of long-term fiscal challenges and difficult choices about 
how the federal government allocates limited resources. Reviewing 529 
plans in conjunction with the other billions of dollars in federal 
educational assistance provided through tax expenditures, credits, and 
deductions could help Congress determine whether this program is 
meeting its goals. Similar to GAO's prior work on higher-education 
related tax expenditures, our analysis of 529 college savings plans 
was not able to address all questions that could inform future policy 
choices regarding 529 plans. For example, what is the purpose of the 
federal tax benefits provided through 529 plans? Are the goals and 
objectives clearly defined and measurable? Who is the target 
population for 529 plans and does the current structure provide 
appropriate incentives for that population? How do the 529 plan 
federal tax benefits interact with other programs, such as federal 
financial aid and other higher education tax benefits and savings 
vehicles? Consideration of these questions could facilitate continued 
congressional oversight of this tax expenditure. 

Agency Comments: 

We provided a draft of this report to Education, Treasury, and IRS for 
comment. The agencies provided technical comments that were 
incorporated, as appropriate. 

We are sending copies of this report to the Secretary of Education, 
Secretary of the Treasury, Commissioner of Internal Revenue, relevant 
congressional committees, and other interested parties. In addition, 
the report will be available at no charge on the GAO Web site at 
[hyperlink, http://www.gao.gov]. If you or your staff have any 
questions about this report, please contact me at sagerm@gao.gov or 
202-512-6806. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. GAO staff who made key contributions to this report are listed 
in appendix III. 

Sincerely yours, 

Signed by: 

Michelle Sager: 
Acting Director: 
Education, Workforce, and Income Security Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

Our review examined: (1) the percentage and characteristics of 
families enrolling in 529 plans, (2) the plan features and other 
factors that affect participation in 529 plans, and (3) the extent to 
which savings in 529 plans affect financial aid awards. To answer 
these research objectives, we analyzed government data; interviewed 
state 529 plan officials from select states as well as industry 
representatives and academic experts; reviewed plan documents and 
analyzed industry data; conducted a literature review; interviewed 
federal, state, and institutional financial aid officials; and 
reviewed Department of Education (Education) and Internal Revenue 
Service (IRS) documents as well as relevant federal laws, regulations 
and guidance. 

We assessed the reliability of the data we used by reviewing 
documentation, interviewing knowledgeable officials, and conducting 
electronic testing on relevant data fields. We found the data we 
reviewed reliable for the purposes of our analyses. We conducted this 
performance audit from November 2011 to December 2012 in accordance 
with generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings 
and conclusions based on our audit objectives. We believe that the 
evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Analysis of Government Data: 

To determine the percentage and characteristics of families enrolling 
in 529 plans, we reviewed data from the 2010 Survey of Consumer 
Finances (SCF); the 2007-2008 National Postsecondary Student Aid Study 
(NPSAS); and 2007-2010 Statistics of Income (SOI) federal tax data. 
The 2010 SCF, 2007-2008 NPSAS, and 2010 SOI were the most recent data 
available at the time of our engagement, so to ensure consistency in 
reporting we adjusted all dollar amounts from previous years' data to 
2010 dollars. 

Each of these three data sources (SCF, NPSAS, and SOI) are based on 
probability samples and estimates are formed using the appropriate 
estimation weights provided with each survey's data. Because each of 
these samples follows a probability procedure based on random 
selections, they represent only one of a large number of samples that 
could have been drawn. Since each sample could have provided different 
estimates, we express our confidence in the precision of our 
particular sample's results as a 95 percent confidence interval (e.g., 
plus or minus 2.5 percentage points). This is the interval that would 
contain the actual population value for 95 percent of the samples we 
could have drawn. Unless otherwise noted, all percentage estimates 
based on the SCF, NPSAS, and SOI have 95 percent confidence intervals 
that are within 5 percentage points of the estimate itself, and all 
numerical estimates other than percentages have 95 percent confidence 
intervals that are within 5 percent of the estimate itself. 

For our analysis of the percentage and characteristics of families who 
held 529 plans, we relied primarily on restricted data from the 2010 
SCF. SCF is a triennial survey sponsored by the Board of Governors of 
the Federal Reserve System (Federal Reserve) to provide detailed 
information on the finances of U.S. households. The SCF sample of 
6,492 households represented approximately 118 million households in 
2010. It collects detailed financial characteristics on an 
economically dominant single individual or couple (married or living 
as partners) in a household, which we refer to as a family for the 
purposes of this report.[Footnote 89] For our analysis, we aggregated 
financial information so that, unless otherwise noted, all SCF 
estimates are for the family rather than the individual survey 
respondent. We did not restrict our analysis to families with 
children, in part, because 529 plans can be used for nearly anyone, 
including one's child, grandchild, niece, nephew, and oneself. 
[Footnote 90] However, about 88 percent of families with 529 plans or 
Coverdell Education Savings Accounts (Coverdells),[Footnote 91] a 
similar education savings vehicle, had children 25 years of age or 
younger living with them. Our estimates for 529 plans included 
Coverdells because Federal Reserve officials said respondents did not 
always distinguish between the two account types; therefore, we did 
not separate these responses because of data reliability concerns. 
However, the officials indicated that a larger share of the SCF 
respondents reported having 529 plans than Coverdells. Further, using 
SOI data, we estimate that in 2010 approximately 85 percent of tax 
filers who took a distribution from either a 529 plan or a Coverdell 
reported distributions from a 529 plan while 14 percent reported 
distributions from a Coverdell and 1 percent reported distributions 
from both. We wrote an analysis program that the Federal Reserve ran 
using their restricted SCF dataset to separate information on Medical 
Savings Accounts and Health Savings Accounts, which had been included 
in the 2010 public dataset with 529 plans and Coverdells. Federal 
Reserve officials modified some resulting information to protect the 
privacy of survey respondents, for example by rounding dollar amounts. 

Using SCF, we generated estimates on the percentage and 
characteristics of families enrolled in 529 plans or Coverdells and of 
families not enrolled in these plans. We examined family 
characteristics such as wealth (financial assets), income, education, 
and race or ethnicity. To calculate financial assets, we used the 
methodology the Federal Reserve uses to produce variables for its 
published Bulletin articles. This methodology included assets held in 
checking, savings, and brokerage accounts, certificates of deposit, 
mutual funds, stocks, bonds, life insurance, retirement accounts, and 
other vehicles such as 529 plans. Assets held in retirement accounts 
included those in defined contribution plans (e.g. a 401(k), 
individual retirement account, or thrift savings plan) as well as in 
traditional pensions or defined benefit plans. To calculate income, we 
used the family's self-reported total income. To report the family's 
highest educational attainment, we reviewed the education of each 
respondent and his or her partner or spouse and included whichever was 
higher. We reported information on the respondent's race or ethnicity, 
which does not necessarily indicate the race or ethnicity of other 
family members.[Footnote 92] 

We used 2007-2008 NPSAS data to develop a similar demographic profile 
for college students and generate other estimates on college costs and 
financial aid amounts. NPSAS is a comprehensive study by Education 
that examines how students and their families pay for higher 
education. It includes nationally representative samples of 113,535 
undergraduates, 12,585 graduate students, and 1,581 first-professional 
students[Footnote 93] enrolled any time between July 1, 2007 and June 
30, 2008. The NPSAS data are based on administrative records and 
student interviews, and NPSAS includes survey results from both 
students who received financial aid and those who did not. While we 
used NPSAS to develop a demographic profile for college students 
similar to the one we developed for the general population using SCF, 
families with 529 plans are not directly comparable to families of 
college students. For example, while our estimates using SCF are for 
all families (including families with children in college, with 
children not in college, and with no children), our estimates for 
families using NPSAS are exclusively for families with a current 
college student. In NPSAS, families include the student and the 
student's parents (if the student is dependent) or the student's 
spouse and dependents (if the student is independent). Further, the 
population of NPSAS students' families is not the same as the 
population of families with a child in college because a family may 
have more than one student in college in a given year. Consequently 
students' family characteristics derived from NPSAS are not directly 
comparable to family characteristics based on the SCF, though for the 
purposes of our report we use similar terminology to describe them. 
Similar to our analysis of SCF, we generated estimates of the 
characteristics of college students' families--including income, 
[Footnote 94] education, and race or ethnicity. To report income, we 
calculated the total income of (1) the student's parents (if the 
student was dependent) and (2) the student and the student's spouse 
(if the student was independent). To report the family's highest 
educational attainment, we reviewed the education of each student's 
mother and father and included whichever was higher. We also reported 
information on the student's race or ethnicity, which does not 
necessarily indicate the race or ethnicity of other family members. We 
also developed separate estimates for students who are considered 
either dependent on their parents or independent for financial aid 
purposes. 

We also used NPSAS to generate other estimates related to the cost of 
college and amount of financial aid awards. First, we estimated the 
median annual cost of attendance at 4-year public and private non-
profit institutions. This included tuition and fees, room and board, 
transportation, and personal expenses, though the estimate is valid 
only for students who attended one institution. Second, we estimated 
the percentage of students who received grants and loans, as well as 
the median amount of these grants and loans and the percent and amount 
of college expenses remaining. Third, we generated estimates for the 
proportion of students who filled out the Free Application for Federal 
Student Aid (FAFSA) and, for those who did fill out the FAFSA, the 
proportion who met certain criteria to have assets excluded from the 
federal expected family contribution (EFC) and the proportion whose 
assets affected the EFC. Finally, we calculated the percentage of 
students who received state and institutional financial aid. 

We also analyzed 2007-2010 taxpayer data from SOI to determine the 
extent to which taxpayers used distributions from 529 plans for 
qualified education expenses and how the tax savings from these plans 
were distributed across income levels. The SOI individual tax return 
file is a stratified probability sample of income returns filed with 
the IRS. The SOI sample of 308,583 returns represented approximately 
143 million tax returns filed for 2010. We combined data from the SOI 
individual tax file with information from the Form 1099-Q. A 529 plan 
must file a Form 1099-Q with the IRS and the account owner or 
beneficiary each time a taxpayer receives a distribution from a 529 
plan account.[Footnote 95] This form includes information on the 
amount of the distribution and the earnings (or loss) on the 
distribution. When taxpayers receive a Form 1099-Q, they must 
determine if the distribution was used for qualified education 
expenses. If the distribution, or any portion of it, was nonqualified, 
the earnings portion is subject to taxes and, in some cases, a 
penalty. The taxpayer determines the amount of taxes and penalty owed 
on the nonqualified distribution by completing Form 5329, which is 
contained in the individual tax return file. By combining information 
from the 1099-Q with information in the individual tax return file, we 
identified the percentage of taxpayers who reported nonqualified 
distributions that were subject to a penalty.[Footnote 96] We also 
used SOI data to estimate the tax savings by using the National Bureau 
of Economic Research's (NBER) TAXSIM Model, a microsimulation model of 
U.S. federal and state income tax systems.[Footnote 97] TAXSIM 
calculates estimated liabilities under U.S. federal and state income 
tax laws from actual tax returns that have been prepared for public 
use by the Statistics of Income Division of the IRS.[Footnote 98] Our 
analysis of the tax savings from 529 plans excludes returns with a 
filing status of married filing separately. 

Interviews with State 529 Plan Representatives, Academic Experts, and 
Industry Representatives: 

To provide information on the factors that affect participation we 
interviewed officials from the following five state 529 plans and 
their industry partners: Louisiana, Michigan, Pennsylvania, Utah, and 
Virginia. We used College Savings Plan Network (CSPN) data to select 
states that represented a variety of plan types (direct-sold, advisor-
sold, and pre-paid), offered a number of features (i.e., various state 
tax benefits, state matching program), and were geographically 
diverse. We also used suggestions provided by academic experts and 
industry representatives to inform our selection as well as to provide 
information on 529 plan participation. We interviewed academic 
researchers (including the Center for Social Development), industry 
regulators (the Financial Industry Regulatory Authority and the 
Municipal Securities Rulemaking Board), financial services companies 
(American Funds and UPromise), financial experts (such as Financial 
Research Corporation and Morningstar), College Savings Plan Network, 
Savingforcollege.com, and consumer interest groups (Investment Company 
Institute and the American Association of Individual Investors). 

Analysis of Plan and Industry Data and Documentation: 

We analyzed CSPN data on state 529 plans to provide a national 
overview of plan features, such as fees and state tax benefits. 
Biennially, states submit plan data to CSPN through an online system 
to be posted on the CSPN website. CSPN provided us with data on each 
state as of July 2012. We analyzed the data for every state for both 
direct-sold and advisor-sold plans on the following features: whether 
the state offers a matching grant program, whether the state offers 
tax deductions for contributions and the amount, whether the state 
offers tax credits for contributions and the amount, types of 
investment options offered, total contribution limits, and required 
initial contribution amounts. We also analyzed the following fee 
categories: program manager fee, state fee, annual account maintenance 
fee, miscellaneous fee, annual distribution fee, estimated underlying 
fund expenses, total annual asset-based fees, maximum deferred sales 
charge, and minimum initial sales charge. 

Further, we compared CSPN disclosure principles with direct-sold plan 
disclosure documentation for the five states we interviewed. We 
reviewed the extent to which the selected states incorporated elements 
of the CSPN disclosure principles and whether plan documentation was 
easily comparable across states. Specifically, we compared whether the 
state documents contained eleven elements outlined in the principles, 
including: a summary of key features, an assessment of the individual 
summary features, a statement of any guarantee by the state issuer or 
the state, information on state tax treatment and other benefits, 
information that the state offers more than one plan, fee 
descriptions, and investment risks, among others. These elements were 
chosen based on discussions with states and experts who identified 
plan fees, tax benefits, and investment options as some of the most 
important features consumers consider when choosing whether or not to 
participate in a 529 plan. In addition to recording whether states 
have disclosed the information listed above, we assessed whether any 
information was missing, where the information was located in the 
document, and any other observations about the ability to find and 
understand plan information. 

Literature Review: 

We reviewed studies conducted by academics, researchers, industry 
representatives, and federal agencies on why families choose to 
participate in 529 plans and what features might serve as barriers or 
incentives. We identified literature published since 2006, when 
Congress passed the Pension Protection Act of 2006, Pub. L. No. 109-
250, which made permanent the tax-exemption on 529 plan distributions 
used for qualified education expenses. Our review included scholarly/ 
peer reviewed material, government reports, hearings and transcripts, 
trade/industry articles, association/nonprofit/think tank 
publications, and working papers. We searched information sources such 
as EconLit, ProQuest, ERIC, PolicyFile, WorldCat, ECO, PapersFirst, 
ArticleFirst, and Academic OneFile. These online sources are 
nationally recognized databases that index and abstract research 
literature. We selected search terms to capture literature that 
specifically addressed 529 plans, college savings plans, qualified 
state tuition programs, and prepaid tuition. Of the 32 studies we 
identified, 12 studies met the following criteria: 1) included 
information on plan features in specific states, 2) addressed the 
consequences for consumers of choosing one type of 529 plan over 
another, 3) identified barriers or incentives for consumers to choose 
529 plans, 4) included data collected by states on plan participation, 
and/or, 5) included information on plan disclosures to consumers. All 
studies cited in the report were reviewed by at least two GAO 
analysts. Studies that included statistical methods were reviewed by a 
GAO statistician and social science analyst. All studies were reviewed 
for methodological soundness and to ensure that any limitations 
associated with study methodologies were conveyed to readers in our 
report text, footnotes, or this appendix. 

Financial Aid Analysis: 

To understand the extent to which savings in 529 plans affect federal 
financial aid awards, we interviewed Education officials in the Office 
of Postsecondary Education. We also reviewed relevant statutory 
provisions, the FAFSA, the Federal Student Aid Handbook, and other 
Education documents related to calculating the EFC. 

To understand the extent to which savings in 529 plans are considered 
in state financial aid calculations, we interviewed officials from 
state financial aid offices in six states. To select the state 
financial aid offices, we used information from a 2009-2010 survey by 
the National Association of State Student Grant and Aid Programs to 
identify states that indicated they used a financial aid formula other 
than the federal methodology in their primary needs analysis and/or 
provided special treatment for state 529 plans. For report 
consistency, we selected the same states selected for 529 plan site 
visit locations to the extent possible (i.e., where the data supported 
the selection based on the criteria). We interviewed representatives 
in the following state financial aid offices: Louisiana Office of 
Student Financial Assistance, Michigan Office of Scholarships and 
Grants, New York Higher Education Services Corporation, Pennsylvania 
Higher Education Assistance Agency, Utah Higher Education Assistance 
Authority, and State Council of Higher Education for Virginia. 

We also selected six institutions from the states whose financial aid 
offices were selected for interviews. To obtain a national perspective 
on institutional financial aid and determine the best method for 
selecting the individual institutions, we interviewed representatives 
at several financial aid organizations including the Association of 
Private Sector Colleges and Universities, the College Board, the 
National Association of Student Financial Aid Administrators, the 
National Association of Independent Colleges and Universities, and the 
American Association of Community Colleges. In these interviews, some 
officials said that schools with larger endowments were likely to 
require families to provide additional information, such as that 
required on the College Board's PROFILE application, to award their 
institutional financial aid.[Footnote 99] We matched the 2012-2013 
College Board's list of institutions that use the PROFILE application 
with Education's 2009-2010 Integrated Postsecondary Education Data 
System to calculate endowment amounts per student at public and 
private non-profit four-year institutions. We also reviewed the list 
of schools that participate in the Private 529 Consortium and selected 
at least one school that was also part of this group. One state did 
not have an institution that used the PROFILE application so we 
reviewed websites of postsecondary schools in that state to identify a 
school that collected data in addition to the FAFSA. We interviewed 
representatives at the following institutions: Xavier University of 
Louisiana, University of Michigan, St. Lawrence University, Swarthmore 
College, University of Utah, and University of Richmond. 

[End of section] 

Appendix II: Free Application for Federal Student Aid, 2012-2013: 

Attachment contains: 

FAFSA: Free Application for Federal Student Aid. 

Total of ten pages. 

For help: [hyperlink, http://www.studentaid.ed.gov/completefafsa] 
1-800-433-3243. 

[End of section] 

Appendix III: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Michelle Sager, Acting Director, Education, Workforce, and Income 
Security Issues, 202-512-6806 or sagerm@gao.gov. 

Staff Acknowledgments: 

In addition to the contact named above, Gretta Goodwin (Assistant 
Director), Amy Anderson, Rachel Beers, and Laura Henry contributed to 
all aspects of this report. Also making key contributions were Carl 
Barden, James Bennett, Nora Boretti, Jessica Botsford, Jason Bromberg, 
Alicia Cackley, Melinda Cordero, Patrick Dudley, Shannon Finnegan, Kim 
Frankena, Mark Glickman, David Lewis, Ashley McCall, John Mingus, Mark 
Ramage, MaryLynn Sergent, George Scott, Walter Vance, Kathleen van 
Gelder, and Michelle Loutoo Wilson. 

[End of section] 

Footnotes: 

[1] The College Board reported that the relative stability of the ratio 
of grant to loan amounts over time indicates that loans have not 
replaced grants. However, grant aid often fails to increase rapidly 
enough to fill the growing gap between the costs of attending college 
and the ability of students and families to pay those costs. College 
Board Advocacy and Policy Center, Trends in Student Aid 2011 (New York, 
NY: 2011). 

[2] Federal Reserve Bank of New York, Research and Statistics Group, 
Microeconomic Studies. Quarterly Report on Household Debt and Credit. 
(New York, NY: August 2012). Debt amount is as of second quarter 2012. 

[3] Small Business Job Protection Act of 1996, Pub. L. No. 104 -188 § 
1806, 110 Stat. 1755, 1895, codified at 26 U.S.C. § 529. 

[4] Qualified higher education expenses include tuition, books, 
supplies, and equipment. Costs for room and board are considered 
qualified education expenses if students are enrolled at least half-
time. Qualified higher education expenses also included expenses paid 
or incurred in 2009 and 2010 for computer technology, equipment, or 
Internet access and related services. Eligible educational institutions 
include colleges, universities, vocational schools, or other 
postsecondary institutions eligible to participate in a federal student 
aid program authorized by Title IV of the Higher Education Act of 1965, 
as amended. This includes virtually all accredited, public, nonprofit, 
and for-profit postsecondary institutions in the U.S. 

[5] Data provided by the Financial Research Corporation. Account 
numbers and assets are as of year-end 2011. 

[6] Tax expenditures are reductions in a federal taxpayer's tax 
liability that result from special credits, deductions, exemptions and 
exclusions, deferrals of tax liability, and preferential tax rates. The 
federal revenue forgone may be viewed as spending channeled through the 
tax code. This estimate by the Department of the Treasury (Treasury) 
includes both college savings plans and prepaid plans. For fiscal year 
2011, the Joint Committee on Taxation reported revenue loss estimates 
of $500 million for college savings plans and less than $50 million for 
prepaid plans. Revenue loss estimates do not incorporate any behavioral 
responses and, thus, do not necessarily represent the exact amount of 
revenue that would be gained if a specific tax expenditure was 
repealed. 

[7] GAO, Higher Education: Improved Tax Information Could Help Families 
Pay for College, [hyperlink, http://www.gao.gov/products/GAO-12-560] 
(Washington, D.C.: May 18, 2012). The analysis used in this report 
also included Coverdell Education Savings Accounts (Coverdells). 
Similar to 529 plans, Coverdell accounts allow families to save for 
education expenses. Account earnings accumulate tax-deferred and 
earnings included in withdrawals used to pay for qualified education 
expenses are not subject to federal tax. Unlike 529 plans, (1) 
Coverdell contributors must generally have a modified adjusted gross 
income of less than $110,000 per year ($220,000 in the case of a joint 
return), (2) Coverdells have annual contribution limits of $2,000 that 
must generally stop when a beneficiary reaches 18 years of age, and 
(3) Coverdells can be used for qualified elementary, secondary, or 
postsecondary expenses typically for individuals under age 30. 

[8] GAO, Government Performance and Accountability: Tax Expenditures 
Represent a Substantial Federal Commitment and Need to Be Reexamined, 
[hyperlink, http://www.gao.gov/products/GAO-05-690] (Washington, D.C.: 
Sept. 23, 2005). 

[9] The SCF codes responses for 529 plans and Coverdells together. 
Survey officials said respondents did not always distinguish between 
the two account types; therefore, we were unable to separate these 
responses because of data reliability concerns. 

[10] CSPN is an affiliate to the National Association of State 
Treasurers and serves as a clearinghouse for information on 529 plans. 
Plan data are as of July 2012. 

[11] The College Board is a not-for-profit organization that provides 
college students with financial aid support and scholarships. It also 
conducts research and advocacy on behalf of students, educators, 
schools, and colleges. The PROFILE is a form developed by the College 
Board to help institutions gather information used to award nonfederal 
student aid funds. 

[12] Pub. L. No. 107-16, § 402, 115 Stat. 38, 60. Previously, earnings 
had been allowed to grow on a tax-deferred basis, but were taxed upon 
distribution to pay for qualified education expenses. 

[13] One additional prepaid plan is not run by a state. The Private 
College 529 Plan provides a prepaid tuition plan at more than 270 
participating private colleges and universities. The Economic Growth 
and Tax Relief Reconciliation Act of 2001 amended section 529 to 
provide that one or more eligible educational institutions could 
establish and maintain a prepaid tuition plan. Prior to that amendment, 
qualified tuition programs were defined as those established and 
maintained by a state or state agency or instrumentality. 

[14] Contributors may elect to treat contributions between $13,000 and 
$65,000 as having been made over a 5 calendar-year period without being 
subject to federal gift taxes. 

[15] According to CSPN data, overall contribution limits ranged from 
$235,000 to $400,000 as of July 2012. However, there is no limit on the 
number of accounts for which an individual can be named the 
beneficiary. According to a 2009 Treasury report, An Analysis of 
Section 529 College Savings and Prepaid Tuition Plans, a beneficiary 
can have accounts in as many as 44 states, with effectively no limit on 
the overall 529 account balance. 

[16] An American Opportunity or Lifetime Learning Tax Credit can be 
claimed in the same year the beneficiary takes a tax-exempt 
distribution from a 529 plan as long as the same expenses are not used 
for both benefits. 

[17] Qualified education expenses must be reduced by any tax-free 
educational assistance, such as the tax-free part of scholarships and 
fellowships, veterans' education assistance, Pell grants, and employer-
provided education assistance. 

[18] IRS Notice 2001-55. 

[19] IRS Notice 2009-1. 

[20] A member of the beneficiary's family is defined as including a 
father, mother, brother, sister, child, grandchild, niece/nephew, son/
daughter-in-law, spouse of any individual listed above, and a first 
cousin, among others. 

[21] Wyoming no longer operates its own plan and has entered into an 
agreement with Colorado's college savings plan whereby Wyoming 
residents participate under the same terms as Colorado residents. 
Washington only offers a prepaid tuition plan. 

[22] As of July 2012, of the 15 states with prepaid tuition plans, 3 
are no longer accepting new enrollees. Kentucky and South Carolina's 
prepaid tuition plans are currently closed to new enrollments. 
Tennessee also closed its prepaid tuition plan to new enrollees and 
contributions in 2010 due to the cost of tuition increasing faster than 
investment returns. However, it launched a new college savings plan in 
September 2012. 

[23] Tax credits reduce tax filers' income tax liability on a dollar-
for-dollar basis. A nonrefundable credit can reduce the amount of taxes 
owed (tax liability) to zero but not below. A refundable credit can 
reduce the tax liability to zero and the remaining credit is paid to 
the taxpayer as a refund. Tax deductions permit tax filers to subtract 
the applicable contribution amount from income that would otherwise be 
taxable. Therefore, deductions reduce filers' tax liability less than 
credits for any given amount claimed. 

[24] Arizona, Kansas, Maine, Missouri, and Pennsylvania extend the same 
state tax benefits to residents who invest in either their own state's 
529 plan or another state's plan. 

[25] Municipal securities are issued by states and political 
subdivisions or agencies of states. Prepaid tuition plans are generally 
not considered municipal securities. 

[26] See Section 3(a)(2) of the Securities Act of 1933 and section 
3(a)(29) of the Securities Exchange Act of 1934. Disclosures provided 
in connection with the sale of 529 plans are, however, subject to the 
antifraud provisions of the federal securities laws. 

[27] MSRB establishes standards of fair practice, disclosure, and 
suitability and professional qualifications for broker-dealers. 

[28] While MSRB has the authority, subject to Securities and Exchange 
Commission (SEC) approval, to establish such standards, it does not 
enforce its own rules. MSRB rules are enforced against broker-dealers 
by the Financial Industry Regulatory Authority, a self-regulatory 
organization that is subject to SEC oversight, and by SEC. 

[29] The methodology for determining the federal EFC is found in Part F 
of Title IV of the Higher Education Act of 1965, as amended, codified 
at 20 U.S.C. §§ 1087kk - 1087vv. 

[30] Assets that are not required to be reported on the FAFSA include 
principal place of residence, a family farm, family-owned small 
businesses, retirement plans, and whole life insurance. 

[31] Prepaid plans are worth the refund value of the credits or 
certificates. 

[32] Institutional methodology is a College Board formula developed by 
financial aid professionals, in consultation with economists, to 
measure a family's ability to pay for college. A basic principle of 
institutional methodology is the idea that a family's capacity to pay 
is a function of income and assets. 

[33] The SCF asks about survey respondents and members of their 
households (sometimes referred to as primary economic units), which we 
refer to as families. About 88 percent of families with 529 plans or 
Coverdells had children 25 years of age or younger living with them. 
Among the approximately 39 percent of all families that had children 
under 25 living with them, only about 6 percent had 529 plans or 
Coverdells. 

[34] The SCF combines responses for 529 plans and Coverdells. Because 
officials from the Federal Reserve, the federal agency that sponsors 
the SCF, said respondents did not necessarily distinguish between 
Coverdells and 529 plans, we did not separate the two account types. 
However, the officials indicated that a larger share of SCF respondents 
reported having 529 plans than Coverdells. Further, using SOI data, we 
estimate that in 2010 approximately 85 percent of tax filers who took a 
distribution from either a 529 plan or a Coverdell reported 
distributions from a 529 plan while 14 percent reported distributions 
from a Coverdell and 1 percent reported distributions from both. 

[35] There are other vehicles with tax benefits that can be used for 
education savings. Such vehicles include Coverdells, funds under the 
Uniform Gift to Minors Act and Uniform Transfer to Minors Act, 
individual retirement accounts, and savings bonds. 

[36] Information is reported for parents of children younger than 18 
who believed their child is likely to attend college and who were 
saving for this purpose. The survey also found that nearly a quarter of 
these parents saved for college in retirement savings accounts such as 
a 401(k) or individual retirement account. Sallie Mae, How America 
Saves for College: Sallie Mae's National Study of Parents with Children 
under 18 Conducted by Gallup (Reston, VA: 2010). 

[37] We are 95 percent confident that the median amount in these 
accounts was between $9,300 and $20,100. Because Coverdells had annual 
contribution limits of $2,000 in 2010, this estimate may understate the 
median amount in 529 plans. However, other data sources have similar 
findings specific to amounts saved in 529 plan accounts. For instance, 
in 2011 the College Savings Plan Network reported that the average 
amount in 529 savings plans was $15,492 in 2010. Unless otherwise 
noted, all SCF percentage estimates have 95 percent confidence 
intervals within 5 percentage points of the estimate itself. 

[38] Financial assets include, among other things, resources in 529 
plans, checking and savings accounts, stocks, bonds, and retirement 
accounts. See appendix I for more detail. 

[39] We are 95 percent confident that the median financial asset value 
for families with 529 plans or Coverdells was between $247,400 and 
$579,600. For families without 529 plans or Coverdells, the 95 percent 
confidence interval is between $13,700 and $17,100. 

[40] For our purposes, retirement assets include those in defined 
contribution plans (e.g. retirement savings plans such as a 401(k)), 
individual retirement accounts, and defined benefit plans from which 
the participant has the option to borrow or withdraw for both the SCF 
respondent and his/her spouse. 

[41] We use the term 'traditional pensions' to refer to defined benefit 
plans. 

[42] We are 95 percent confident that the amount of retirement assets 
for families with 529 plans or Coverdell accounts was between $149,700 
and $277,500, while the amount for families without these accounts was 
between $37,400 and $43,200. 

[43] We are 95 percent confident that the percentage of families with 
529 plans or Coverdell accounts who believed they will have more than 
enough retirement income was between 19.9 and 33.9 percent. For 
families without 529 plans or Coverdells, the 95 percent confidence 
interval was between 15.1 and 16.9 percent. 

[44] In 2012, we reported similar findings using data from the 2007 
SCF. [hyperlink, http://www.gao.gov/products/GAO-12-560]. 

[45] Because Coverdell contributors must generally have had a modified 
adjusted gross income of less than $110,000 per year ($220,000 in the 
case of a joint return) in 2010, this estimate may understate the 
median income of families with 529 plans. We are 95 percent confident 
that the median income for families with 529 plans or Coverdells was 
between $125,400 and $159,400. 

[46] We are 95 percent confident that the percentage of families with 
529 plans or Coverdells who have incomes over $150,000 was between 
38.8 and 54.4. For families without 529 plans or Coverdells, the 95 
percent confidence interval was between 7.6 and 8.6 percent. 

[47] The Department of the Treasury, An Analysis of Section 529 College 
Savings and Prepaid Tuition Plans: A Report Prepared by the Department 
of Treasury for the White House Task Force on Middle Class Working 
Families (Washington, D.C.: September 9, 2009). 

[48] For example, see OECD (2012), Education at a Glance 2012: OECD 
Indicators, OECD Publishing. Accessed on September 11, 2012. 
[hyperlink, http://dx.doi.org/10.1787/eag-2012-en]. 

[49] Research shows that racial or ethnic minorities are more likely to 
be low-income, which is a risk factor that may be associated with less 
positive educational outcomes and can affect educational achievement. 

[50] The family may be multi-racial or mixed race, which is not 
captured in these data. For example, the respondent's spouse/partner 
may have a different race or ethnicity. We are 95 percent confident 
that the percentage of respondents whose families had 529 plans or 
Coverdells who identified as white (non-Hispanic) was between 78.2 and 
88.8 percent. 

[51] These were the most recent NPSAS data available. 

[52] While our estimates using SCF are for all families (including 
families with children in college, with children not in college, and 
with no children), our estimates for families using NPSAS are 
exclusively for families with a current college student. In NPSAS, 
families include the student and the student's parents (if the student 
is dependent) or the student's spouse (if the student is independent). 
Further, the population of NPSAS students' families is not the same as 
the population of families with a child in college because a family may 
have more than one student in college in a given year. Consequently 
students' family characteristics derived from NPSAS are not directly 
comparable to family characteristics based on the SCF. 

[53] Data were not available on the financial assets held by families 
of college students. 

[54] Throughout the report, the term states' plans also includes the 
plan offered by the District of Columbia. 

[55] As of July 2012, 5 states allow residents to deduct all 529 plan 
contributions in a given tax year. Overall, 28 states provide a tax 
deduction on contributions, with a variety of limits. Among these 
states, for example, 18 states allow deductions that range from $500 to 
$10,000 for a single filer and $1,000 to $20,000 for married couples 
filing jointly. Additionally, 9 other states also allow deductions--
ranging from $250 to $13,000--per beneficiary. 

[56] We previously reported tax filers may have difficulty figuring out 
how to maximize federal tax benefits given interactions with state tax 
codes. To maximize their combined federal and state tax benefit, tax 
filers may also need to take into account the state treatment of 
federal higher education tax expenditures. See [hyperlink, 
http://www.gao.gov/products/GAO-12-560]. 

[57] A state's administrative fees may vary within a range based on the 
investment option chosen by the participant. 

[58] Initial sales charges are paid when the shares are purchased and 
deferred sales charges are paid when the shares are redeemed. 

[59] Some mutual funds offer investors different types of shares, known 
as classes. Each class will invest in the same investment portfolio but 
will have different shareholder services and/or distribution 
arrangements with different fees and expenses. 

[60] Morningstar, 2011 529 College Savings Plans Research Paper and 
Industry Survey (Chicago, IL: October 2011) 

[61] GAO, Private Pensions: Changes Needed to Provide 401(k) Plan 
Participants and the Department of Labor Better Information on Fees, 
[hyperlink, http://www.gao.gov/products/GAO-07-21] (Washington, D.C.: 
November 16, 2006) and 401(k) Plans: Increased Educational Outreach 
and Broader Oversight May Help Reduce Plan Fees, [hyperlink, 
http://www.gao.gov/products/GAO-12-325] (Washington, D.C.: April 24, 
2012). 

[62] In states we reviewed, assets in prepaid plans are invested by the 
state. 

[63] According to CSPN data, 45 states offer age-based investment 
options and 20 states offer a guaranteed investment option. 

[64] While these assessments are designed to help investors decide 
which plan best meets their risk tolerance and investment goals, state 
officials told us they do not provide investment advice. 

[65] Sallie Mae, August 2010. 

[66] Sallie Mae, August 2010. 

[67] For example, in 2011 a family of 4 earning less than $44,700 would 
qualify, according to plan documentation. 

[68] Center for Social Development, George Warren Brown School of 
Social Work, Washington University in St. Louis, The SEED for Oklahoma 
Kids Experiment: Initial Account Opening and Savings, (St. Louis, MO: 
2010). The study was conducted in partnership with the State of 
Oklahoma and RTI International. SEED for Oklahoma first automatically 
enrolled treatment participants who received $1,000 in an Oklahoma 529 
account. (Among the 1,361 treatment participants, one declined opening 
the state-owned account.) These participants were also provided a time-
limited incentive of $100 to open their own private accounts, savings 
matches, and information on Oklahoma 529 accounts. In contrast, control 
participants were offered no SEED for Oklahoma financial incentives or 
information about Oklahoma 529, although they could open their own 529 
plan accounts, just as any non-study participant. Additional data on 
participants are expected to be collected over the next few years. 

[69] Rates only include additional private accounts opened by 
participants, i.e. accounts that were separate from the state-owned 
accounts that were opened automatically for the treatment group. The 
average deposit amount was $61 for treatment participants and $40 for 
the control group (not statistically significant). However for the 
subcategory of private accounts owned by parents or guardians, 
treatment participants deposited an average of $47 versus $13 for the 
control group (p<.05). 

[70] The Department of Education has emphasized the importance of 
financial literacy related to college savings. For example, the GEAR UP 
program, where grantees design projects that promote participating 
students' secondary school completion and enrollment in postsecondary 
education, also includes promotion of financial literacy and economic 
literacy education or counseling. In 2012, Education announced a plan 
to introduce in fiscal year 2013 a new demonstration project, which 
includes an evaluation component, to determine the effectiveness of 
pairing federally-supported college savings accounts with GEAR UP 
activities as part of an overall college access and success strategy. 
Education has also recently sponsored research assessing interventions 
that provide families with information on 529 college savings plans and 
incentives for them to invest in such accounts. The study will gather 
data on the effects of these interventions on college savings behavior 
and college outcomes. 

[71] Sallie Mae, August 2010. 

[72] Sallie Mae, How America Pays for College 2012 (Newark, DE: 2012). 

[73] Sallie Mae, August 2010. 

[74] If a beneficiary of a prepaid tuition plan elects to attend an 
out-of-state college, the state 529 plan will typically pay the 
student's chosen institution the tuition and fees it would have paid at 
an in-state public college, which may be less than the tuition at the 
chosen institution. 

[75] Prior GAO work has also found education savings accounts, such as 
529 plans, are more advantageous to families with higher incomes and 
tax liabilities. See [hyperlink, 
http://www.gao.gov/products/GAO-12-560]. 

[76] Treasury, 2009. 

[77] Treasury, 2009. In addition, Treasury also recommended increasing 
the provision of age-based indexed funds; making contribution limits 
more effective by making them per-beneficiary limits rather than per-
beneficiary per-state limits; improving industry reporting of plans' 
historical returns, plan participation by income, and how plans are 
invested at the account level; and improving government monitoring of 
529 plan accounts and their disbursements. 

[78] Assets that are not required to be reported on the FAFSA include 
principal place of residence, a family farm, family-owned small 
businesses, retirement plans, and whole life insurance. 

[79] Students can qualify for an automatic zero EFC or a simplified EFC 
based on their parents' income (dependent students) or their income 
(independent students) and any of the following: (1) receipt of federal 
benefits, such as Social Security Supplemental Security Income or food 
stamps, (2) no requirement to file an income tax return or may file an 
IRS 1040A or 1040EZ, or (3) a parent (dependent student) or student/
spouse (independent student) is a dislocated worker. 

[80] Prepaid plans are worth the refund value of the tuition credits or 
certificates. 

[81] The education savings and asset protection allowance increases 
with the age of the older parent. For example, in the 2012-2013 school 
year, the allowance for two parents, the older of which was 45, was 
$41,300 whereas the allowance for two parents, the older of which was 
55, was $53,400. According to Education's Federal Student Aid Handbook, 
the allowances approximate the present cost of an annuity, which, when 
combined with Social Security benefits, would provide at age 65 a 
moderate level of living for a retired couple or single person. 

[82] The 2.64 percent is the result of assessing 22 percent of the 12 
percent of assets that are included in the EFC (.22 X .12 = .0264). 
Similarly, 5.64 percent results from assessing 47 percent of 12 percent 
(.47 X .12 = .0564). 

[83] Since the EFC is based on the previous year's income, 
distributions from a 529 plan not owned by the parent or student would 
not affect the EFC for the student's last year in college if the 
student received the funds after his final FAFSA had been filed. 

[84] In 2007-2008, 61 percent of dependent and 52 percent of 
independent students filled out the FAFSA. 

[85] According to the 2007-2008 NPSAS, 15 percent of all students 
received state financial aid. 

[86] This survey is a central repository for information on state 
support of students and families paying for postsecondary education. 

[87] The District of Columbia and Puerto Rico also reported that they 
use federal methodology. 

[88] According to the 2007-2008 NPSAS, 22 percent of all students 
received institutional financial aid. 

[89] The unit of analysis for the SCF includes this economically 
dominant individual (or couple) along with economically interdependent 
individuals (such as minor children) also living in the household. 

[90] Additionally, because of the limited number of families in the SCF 
sample that had 529 plans or Coverdell Education Savings Accounts, we 
were unable to produce reliable estimates for subgroups of families 
with these accounts, such as characteristics by age group or by whether 
families had children living with them. We were, however, able to 
generate reliable estimates for all families with 529 plans or 
Coverdell Education Savings Accounts. 

[91] Similar to 529 plans, Coverdell accounts allow families to save 
for education expenses. Account earnings accumulate tax-deferred and 
earnings included in withdrawals used to pay for qualified education 
expenses are not subject to federal tax. Unlike 529 plans, (1) 
Coverdell contributors must generally have a modified adjusted gross 
income of less than $110,000 per year ($220,000 in the case of a joint 
return), (2) Coverdells have annual contribution limits of $2,000 that 
must generally stop when a beneficiary reaches 18 years of age, and (3) 
Coverdells can be used for qualified elementary, secondary, or 
postsecondary expenses typically for individuals under age 30. These 
Coverdell features will be affected if the changes in the Economic 
Growth and Tax Relief Reconciliation Act of 2001 are not extended. 

[92] Further, the respondent is not necessarily the head of the 
household. 

[93] First-professional students are students pursuing degrees in 
fields such as pharmacy, dentistry, medicine, or law. 

[94] Information was not available on the assets for families of 
college students. 

[95] Distributions from a 529 plan include those used for qualified 
education expenses as well as those used for nonqualified expenses or 
refunds to the account owner or beneficiary. 

[96] While earnings on all distributions are subject to a tax if the 
distribution was not used for qualified education expenses, the penalty 
is waived under certain circumstances, such as when a beneficiary dies 
or receives a scholarship. 

[97] NBER provided GAO with a copy of TAXSIM that we executed within 
our secure tax computing environment. 

[98] See Daniel Feenberg and Elisabeth Coutts, "An Introduction to the 
TAXSIM Model," Journal of Policy Analysis and Management, vol. 12, no. 
1, (1993): 189-194. 

[99] The College Board is a not-for-profit membership organization that 
provides college students with financial aid support and scholarships. 
It also conducts research and advocacy on behalf of students, 
educators, schools, and colleges. The PROFILE is an application 
developed by the College Board to help institutions gather information 
used to award nonfederal student aid funds. 

[End of section] 

GAO’s Mission: 

The Government Accountability Office, the audit, evaluation, and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the 
performance and accountability of the federal government for the 
American people. GAO examines the use of public funds; evaluates 
federal programs and policies; and provides analyses, recommendations, 
and other assistance to help Congress make informed oversight, policy, 
and funding decisions. GAO’s commitment to good government is 
reflected in its core values of accountability, integrity, and 
reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO’s website [hyperlink, http://www.gao.gov]. Each 
weekday afternoon, GAO posts on its website newly released reports, 
testimony, and correspondence. To have GAO e-mail you a list of newly 
posted products, go to [hyperlink, http://www.gao.gov] and select 
“E-mail Updates.” 

Order by Phone: 

The price of each GAO publication reflects GAO’s actual cost of 
production and distribution and depends on the number of pages in the 
publication and whether the publication is printed in color or black 
and white. Pricing and ordering information is posted on GAO’s 
website, [hyperlink, http://www.gao.gov/ordering.htm]. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 
TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 
MasterCard, Visa, check, or money order. Call for additional 
information. 

Connect with GAO: 

Connect with GAO on facebook, flickr, twitter, and YouTube.
Subscribe to our RSS Feeds or E mail Updates. Listen to our Podcasts.
Visit GAO on the web at [hyperlink, http://www.gao.gov]. 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 
Website: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]; 
E-mail: fraudnet@gao.gov; 
Automated answering system: (800) 424-5454 or (202) 512-7470. 

Congressional Relations: 

Katherine Siggerud, Managing Director, siggerudk@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, DC 20548. 

Public Affairs: 
Chuck Young, Managing Director, youngc1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, DC 20548. 

[End of document]