Congress Should Unlock 529 Accounts for At-Home Learning

Last month, Washington lawmakers responded to the educational challenges created by the COVID-19 pandemic. They opened up the national treasury with CARES Act payments that primarily support school districts and charter schools. But as schoolhouse doors stay shut, any additional federal response should also include direct relief toward families as they support their children’s learning in the uncertain times ahead.

The Mackinac Center this week joins an Americans for Tax Reform coalition calling on Congress to expand the eligible uses of tax-advantaged 529 education savings plans, so they may be “used for expenses related to learning at home.” Many Michigan families will need more flexible options to help them advance their children’s learning in response to widespread school building closures. They may incur expenses for online courses and curriculum, private tutoring services or even therapies to help students with disabilities.

Lawmakers originally set up 529 savings accounts to help families save for college expenses. Once a family member creates an account to help finance a child’s education, contributors to that account can, in many cases, take a deduction or credit on their state taxes. Parents of a child with a 529 account do not pay taxes on its investment earnings nor on money withdrawn to pay for the plan’s intended purposes.

The 2017 federal Tax Cut and Jobs Act added K-12 private school tuition to the slate of eligible expenses, creating the potential for some families to better afford their chosen educational alternatives. But conflicting legal provisions have left it unclear whether Michigan taxpayers could receive a promised state deduction for contributing to a Michigan Education Savings Program 529 plan that paid for private schooling.

As of last fall, MESP plans had total assets of about $5.8 billion, which were saved on behalf of more than 265,000 children. That isn’t a precise figure of how many of the state’s 1.6 million school-aged children could benefit from the proposed change, however, as state residency isn’t a requirement for participating in a specific plan. But given the available state tax deduction, it’s likely most MESP plans benefit Michigan children. Complicating the picture even more, some Michigan families hold 529 plans from other states.

Further expanding the eligible uses of 529 plans would be a welcome change that could benefit families who have greater earning and investment power. To be sure, though, additional solutions are needed for students facing extraordinary learning needs, or for those whose families cannot afford an education savings plan.

Solutions might include federal tax credits for donations to nonprofit K-12 scholarship organizations or giving nonrefundable credits directly to low-income tuition payers. For others, federally funded education savings accounts could give families more control of the services they need to help their children with various disabilities. A similar program has benefited Arizona students for years, with families proving to be extremely responsible stewards of taxpayer dollars.

One of the best ways federal policymakers can help support students facing an unprecedented situation is to take a step that can unleash the creative abilities of families as they take charge of providing what their students need to learn.