Study Shows Savings Gap

nnedy School of Government Assistant Professor Susan M. Dynarski ’87 found that government college-savings plans only exacerbate the disparity between the rich and the poor.

Dynarski examined two of the newest and most effective plans—529 savings plans and Coverdell Education savings accounts—and concluded that these plans serve mainly to help the wealthy parents who save the most money in them each year.

“If the intent of the 529s and Coverdells was to broaden access to college, they are almost certain to fail. If their intent was to provide a tax break to well-off families, they are a roaring success,” Dynarski wrote in an e-mail.

According to Dynarski, the disparity is a result of the fact that families who would not be eligible for financial aid are still eligible for these savings accounts, effectively giving affluent families a free bonus and encouraging them to save for college.

Poorer families, on the other hand, see a reduction of their financial aid based on how much they save.

And Dynarski said the way colleges calculate financial aid complicates the problem by requiring the bulk of the savings to come from accounts in the student’s name, which decreases the amount of eligible aid more than parental accounts do.

Savings plans which hold money under the student’s name can actually reduce the amount of aid by up to $1.24 for every dollar the family saves, she said. Coverdells and 529s, which hold money in the parents’ names, are better, but a family will still see a reduction in aid of between 26 and 39 cents for every dollar.

Furthermore, most college savings accounts impose a strong penalty if the money is withdrawn for another purpose. While high-income families can count on sending their children to college, lower-income families might not be as sure that their child will eventually be able to use the savings account and might not be willing to take the risk.

But Dynarski still believes that college savings accounts are beneficial to low-income families.

“Families should save for college, but carefully,” she said in a press release.

Dynarski also pointed out that not all families who may be eligible for financial aid put their savings in the most effective accounts, citing the baffling web of rules and regulations.

“The aid system has grown so complicated that parents pay financial advisers to teach them how to navigate the financial aid process,” she wrote in an e-mail. “This waste of money and time could be avoided if the aid system were streamlined and simplified. As it stands, some families are punished by the aid system simply because they are not savvy enough to their funds in he right savings vehicle. That’s not fair.”

While Dynarski’s study has yet to published, one of her colleagues already endorsed it.

“This is not old news. These programs are relatively recent,” Christopher N. Avery, professor of public policy at the Kennedy School. “It’s really outstanding research.”