Thought Leadership Thursday
25+ Years of Innovation, Struggle, and Success
Thought Leadership Thursday Article
Saturday, May 29th will be a special "529 Day," one where we’ll celebrate the first 25 years of the college savings industry and the many steps the federal government, states, and program managers took to create new savings models, reduce fees, and expand the flexibility of 529 College Savings accounts.
Today, the industry is thriving. At the close of 2020, the 529 industry had more than $425 billion in assets across approximately 14.8 million accounts nationwide. To put that in perspective, that’s enough savings for more than 4.5 million students to each pay for four years of full-time tuition, fees, room, board, and books at a public 4-year university.
It took a lot of struggle and innovation to reach millions of families and save billions of dollars. A lot of the credit belongs to innovative states like Florida, Michigan, Ohio and Wyoming, that created some of the earliest prepaid programs in the late 1980’s. Michigan was a particular trailblazer thanks to its 1994 court victory in the Sixth Circuit, definitively allowing Michigan to make its prepaid plan tax-exempt as an instrumentality of the state.
Following the Sixth Circuit decision, the Internal Revenue Service declared its intention to contest the tax status of each plan on a case-by-case basis, which prompted the states to increase their efforts in Congress to secure federal tax advantages to promote college savings.
Our modern 529 industry was born in 1996 when a bipartisan effort to provide federal tax relief for all plans, resulting in the creation of Section 529 of the Internal Revenue Code. The 1997 Tax Relief Act further expanded the federal tax benefits, leading to explosive growth in the launch of savings plans.
In those early years, the industry was characterized by rapid growth and experimentation. Thirty states launched a 529 plan within five years of the establishment of Section 529. Slowly but surely, the number of savers and size of the market grew. Five years after 1996, 1.5 million accounts had been established with a combined $8 billion in contributions.
In the early 2000s, states and program managers found new ways to lower the costs of saving in 529 plans. Iowa, Nevada, California and others incorporated index funds to substantially reduce the costs of investment lineups. Program managers found efficient ways to lower fees – which were a key driver as many states put their programs out to bid.
Over the decade we just completed in 2020, 529 plans became more flexible savings vehicles for families, with qualified expenses expanding to include computers, internet, K-12 expenses, apprenticeships, and the repayment of student loans. The industry has continued to mature, with ever-lower fees, new mobile apps, gift cards, and much more.
The 25-year effort to make 529 plans accessible, affordable, and smart savings vehicles for families has not gone unnoticed. In 2020, families contributed more than $35 billion to their 529 plans, quadrupling the total amount of contributions made in the industry’s first 6 years combined.
Despite the success of the industry’s first 25 years, our most successful days lie ahead. In 2020, there were approximately 63 million families with children under the age of 18 in the United States, implying that perhaps only 15% of American families have at least one 529 account. There remains substantial work ahead to ensure all families – of all incomes, races, ethnicities, and geographies – are accessing 529 plans to save for their children’s’ future educational dreams.