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YOU COULD CALL ME a 529 superfan. The college savings plans helped me put my two kids through college. Their state and federal tax advantages cut the exorbitant cost of college just enough so we didn’t have to borrow for our two kids’ education.
Which makes it surprising that I knew the man who created the 529 plan—but I didn’t realize he’d fathered them.
I covered Senator Bob Graham of Florida as a newspaper reporter in Washington in the 1990s, but left the beat the year before he introduced his 529 legislation. I only learned of his role in 529s shortly before he died on April 16 at age 87 in a retirement community in Gainesville, Florida.
As a senator, Graham was tan and affable, but he spoke hesitatingly, choosing his words with care. He was what my old political science professor would have called a workhorse, not a show horse. A Harvard-educated lawyer, Graham concerned himself more with details than speech-making, and he worked well in a divided legislature.
A Democrat, Graham worked across the aisle with Senator Mitch McConnell of Kentucky, a Republican, to write and pass the rules around 529 plans. About a dozen states, including Florida, had created state college savings plans by then, but the rules were inconsistent and limiting.
In Florida, for example, parents could buy a tuition credit for a newborn at a fixed price that would pay for one credit hour of classes 20 years later. That was quite a bargain given the inflation rate in education, but it only worked if your child attended a state university in Florida. If your child went to an out-of-state institution or to a private college in Florida, you got a refund of your money paid, not college credits.
Graham realized we needed one college savings system for the entire nation, so parents in any state might participate. In the legislation he introduced in 1996, Congress sheltered the gains in 529 plans from federal taxation. Later, in 2001, Congress went further, exempting plan withdrawals from federal taxes providing the money was spent on higher education.
With those tax breaks in place, 49 states have created 529 plans for their residents—Wyoming is the lone exception. I contributed a great deal of money to 529 plans, and I saved a lot of money because of them. I invested through a low-cost 529 plan in Utah, which my home state of Pennsylvania permitted. Our 529 accounts helped put our son Michael through Ithaca College, and our daughter Genevieve through Franklin and Marshall.
Paying eight years of college bills took every spare cent we could scrape up. How did 529s help? I found a credit card that would give me 1.5% back on all my spending, with the money deposited in a 529 plan. Every year when my kids were young, my wife and I contributed about $13,000 each annually to the Utah 529. We could deduct those contributions from our reported state income.
Pennsylvania’s tax rate is 3.07%, so that deduction saved us almost $800 a year. We owed no taxes on plan withdrawals for tuition, books and fees. One way and another, I estimate that 529 plans reduced my kids’ college costs by 10%.
Senators aren’t known to be shrinking violets, and fathering a program like the 529 could have made Graham’s name enduring—if he’d attached his name to the plans. That’s how Senators Claiborne Pell, William Roth and J. William Fulbright have kept their names alive long after they’ve departed. Not so with Graham. The 529 takes its name from its section in the federal tax code, just like the 401(k).
The word on Graham in Washington was that he lacked charisma. The Washington Post described him once as a “sober, conscientious, unfailingly courteous grandfather who couldn’t light up a room with a barrel of Iraqi crude and a Zippo.”
When I interviewed Graham, he was careful with his words. He would repeat your question, and maybe question its premise. He had a smiling, courteous presence, but he didn’t have a free and easy way about him. Yet voters seemed to sense his seriousness and purpose. He never lost an election. He served two terms as Florida’s governor and three as its U.S. senator. What he lacked in style, he made up for in substance.
Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.
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Count me in as another 529 fan. Since birth, at every of my children’s birthdays and Christmas get-together’s, some uncles/aunts, being lazy at gift shopping, often gave my children cash (yep, $5-bills or $100-bills). I gathered the cash and deposit them to the respective children’s 529 fund. Fast forward to their HS graduation day. I checked the balances of their 529 accounts and to my surprise, the performance of the mutual funds exceeded my expectation.
Thanks for the post! I always wonder how we got here i.e. how we got to where we are now from the way things were in the past. I appreciate the economics and history lesson regarding Graham’s contributions to the 529.
Each of our children graduated college free from debt in any form, neither educational nor personal or anything else. (I can hear HD readers cheers 🙂 ) 529 plans were a part of that success.
Indiana’s 529 includes a tax credit of 20% up to $1000 total and at least one FDIC insured option. Also certain tuition (like for nursing, robotics, etc.) in Indiana’s community colleges in generally free for students who do not have a degree. The credit earned is required to be accepted by the State’s 4-year universities of students decide to pursue a 4-year degree. These aspects seem to me like what would make Graham proud. (Also, everyone at HD can be happy that you don’t have to pay for this if you’re in a different State.)
I admit that increasing- in other words inflating-the money supply available for education does allow and enable the cost to go up, but that is the norm in the world we live in today. So I can accept this targeted effort.
A big problem with 529 accounts is that, in the typical situation, parents can only contribute for a limited time (birth through teen years of the kid) and must withdraw over the four-year college period. Contrast that with, perhaps, a 40-year contribution period for a 401k / IRA and a withdrawal period of 2-3 decades. The 529 tax and investment benefits are really limited in comparison (especially if investments are shifted to cash or bonds for safety in the years before withdrawal). Additionally, younger parents are less likely to be able to contribute a lot during the child-bearing and -raising years.
That said, the accounts provide a terrific opportunity for generous relatives to fund a grandkid’s or niece/nephew’s education. A mixed bag.
This was a nice backstory on Bob Graham’s quiet yet significant role in helping to create 529 plans. I would argue that 529 accounts are equally as important as employer 401(k)s, IRAs and HSAs for assisting families with achieving their financial goals.
My wish list for congress around 529s still includes two items:
1) Simplify the current draconian rules & dollar limitations for re-characterizing unused 529 funds into Roth IRA contributions for the 529 account’s designated beneficiary that were included in Secure 2.0 legislation. The required holding period for 529 funds to have been inside the account before a Roth transfer can be done, plus the annual dollar limit on how much $ can be moved between a 529 and an Roth IRA are significant obstacles to seeing this option gain traction – particularly for families that don’t have a financial advisor monitoring the rules and assisting them with this intra-account transfer.
2) Add a future legislative provision that permits unused 529 funds to be used as a tax-deductible contribution to non-profit K-12 schools / trade schools / colleges. Some parents don’t have the blessing of grandkids to change the 529 account beneficiary to after their adult children are done with education. A tax-advantaged gift of excess 529 funds to a school that has made a difference for their family or even within their local community would be an attractive option for employing excess dollars for the benefit of others.
The 529 plan was in place in 30 states by the year 2000. If you look at a graph of average college costs, the line gets significant steeper starting around 2002. Good thing we had the 529 in place, right? Wrong. This is the classic law of unintended consequences. Colleges realized people now pile up savings in these plans to pay for college, so they were free to increase amenities to attract more of that money. And it’s primarily the amenities that make college more expensive. Now after 20+ years, we can see the situation has gone from bad to absurd. That’s the problem with the “change B to address problem A” mentality, it invites unintended consequences. A college degree drives income inequality, more than any other factor. As a capitalist I’m fine with that. However, I also believe in equality of opportunity, and the 529 plan is antithetical to that type of equality. Households with money get a tax advantage to make college costs lower, and households without money do not.
It’s a similar problem to forgiving student loan debt. Those with college experience have higher lifetime earnings. Using tax dollars to pay for that loan forgiveness means those with lower lifetime earnings, those without college degrees; have to pay the bill for those with higher lifetime earnings, those with college degrees.
Suburban taxes also do something similar. Suburban infrastructure for water, sewer, gas, electric, and roads require far longer runs, both between neighborhoods and within neighborhoods, than more urban areas. And yet, the property tax paid per unit of that ongoing cost is much smaller in the suburban areas, because it’s based on assessed value only. This completely ignores what should be the basis for taxes, the assessed cost of the infrastructure required to maintain a property.
So I have zero praise for 529 plans. On the contrary, look forward to the day when people finally wake up and eliminate all of these regressive taxes.
Wow – a lot to unpack here – not all of which I tend agree with, but there are some items to chew on as well. Gonna need to re-read this comment a few times. Appreciate the time you spend to craft your divergent opinion.
Upon further reflection, I would argue that the “Bennett Hypothesis”, first posited back in 1987 by then U.S. Education Secretary Bill Bennett, is closer to the mark as a driving force behind the lack of “equality of opportunity” in higher education for lower income U.S. households.
Admittedly, it’s still the same problem (outrageous year-over-year increases in the cost of post-secondary education) but it’s largely being exacerbated by a different (and larger) taxpayer-subsidized bucket of money: federal-subsidized student loans / grants in aid. A good summary of Bennett’s Hypothesis can be found at Savingforcollege.com
That explanation doesn’t align with the timing of the increased rate of change to tuition. We’ve had student loans since 1958 and Pell grants since 1973, but the rate of change (slope of the line) significantly increase after 2002.
In addition, tuition tracked with normal inflation until 1984, and I know of no significant changes to student loan or grant programs during that time. And per your own link “Even if the Bennett hypothesis is true, the lack of a strong correlation suggests that it depicts at best a weak relationship.”
See the first graph here:
https://medium.com/@noamaltzman/keeping-up-with-modern-society-rising-cost-of-higher-education-ce451f052428
Aren’t the people without money getting college assistance in the form of student aid, grants, etc.
Interesting points you make, especially property taxes and infrastructure. Always there are unintended consequences.
I didn’t know about Graham’s role in the 529. Thanks for that. He also ran for president, but (obviously) did not win the nomination.
Greg, thanks for an interesting article. the plans didn’t come along in time for our sons, but they will help our grandsons.
Thanks for the background on the beginnings of the 529. I have a friend who put his 2 daughters through the Univ. of Fla via the program you described. It turned out to be a great deal for them; One is now a physician and the other an engineer.
I would be proud to be described as a “sober, conscientious, unfailingly courteous grandfather”. That description gives me something to shoot for.
Greg, thanks for an interesting article. I remember Sen. Graham but likewise never knew he was the father of 529 plans.
529s became available in time for us to use them to save for college for our two youngest kids. Like you, we benefited substantially from them.
But they later caused me a real tax headache. For several years, I received a “letter audit” from the IRS. There was no place in our tax return to show that the withdrawn funds were used to pay for education expenses. So the IRS said, in effect, “You owe us taxes on all the money withdrawn, unless you can prove it was used for educational expenses.”
I spent some long weekends documenting every dollar spent from the 529 accounts, and showing it was all for the allowed purposes. Fortunately, that satisfied the IRS, and they even sent me a “refund check”, which I don’t understand to this day.
That was many years ago. Have things changed with the IRS or the tax forms when it comes to 529 expenditures? I sure hope there’s an easier way to handle it now.
Andrew, I’m sorry this happened to you. You may have been unlucky in the audit lottery. I’ve never had to face such questions myself. The trend seems to be to make 529s easier and more helpful. Unused 529 funds can be rolled over to a Roth IRA account penalty-free, for example, thanks to recent Congressional legislation.
I am also a big fan of saving for college for our children & grandchildren. I was late to the party for our children but like Dick Quinn I am currently contributing to a 529 for a grand child.
Besides the ultimate impact of the reduction in the cost of funding a college education there seems to be other positive outcomes from such 529 savings that rival the college cost reduction impact.
In a April 2017 Harvard paper the authors, Long and Bettinger, cited descriptive and correlational analyses which suggest that dedicated college savings may be linked to stronger academic performance, enhanced college-going aspirations, higher college enrollment, greater persistence to postsecondary graduation as well as reduced amount of student loan debt, particularly among low-and moderate income families.
Helping to fund a 529 seems like a great use for money to this grand dad.
Thanks for this story. 529’s were indeed a great invention. I also find it heartening when our representatives work together to help people.
I’m thankful for the 529 plan. It will help with a nice slice of our daughter’s education beginning this year. I didn’t know Bob Graham was behind it. I remember his service as Florida governor and senator well, as I was a Florida resident during those years. Thanks for the tribute.
529 plans came too late to help with our four children, three of whom went to F&M like your daughter, but they have given us a way to help our eleven grandchildren and we have made monthly contributions, and for holiday gifts and birthdays since each was born. The oldest started 19 years ago.
The total in the accounts is substantial, but spread among 11 accounts each is not huge, but will help. What is interesting is that because of the timing and markets, the oldest accounts don’t have the largest balance.
An excellent article; informative of 529 plans, a good historical review, and finally a nice tribute to a key figure in their creation. Well done. Let’s hope articles such as yours, by shining the light on past laudable political accomplishments will help inspire our politicians of today and tomorrow.