College Savings Plans May Make Sense for Cash-Strapped Families

When President Barack Obama proposed eliminating a major tax advantage to 529 college savings plans last year, one of the primary reasons was to direct more tax breaks to middle-class families.
The proposal was withdrawn after an outcry from parents and lawmakers, but it raised an important question: Do the tax-advantaged college savings plans make sense for lower and middle class families?
The accounts grow tax-deferred and withdrawals are exempt from federal income tax when used for qualified education expenses.
Data show that those families who save in 529 and Coverdell accounts – another type of tax-advantaged college savings plan – tend to be wealthier, according to a 2012 Government Accountability Office report, with about three times the median income of families who do not have such accounts. But plan managers and state administrators say there are still plenty of families of lesser means using the plans.
Young Boozer, Alabama state treasurer and chairman of the College Savings Plans Network, points to the fact that while the average Alabama account size is about $17,000, the median account size is $6,500.
“If you look at our median balances in our accounts, it’ll tell you this is a program being used by wide range of people: A lot of people in middle income and maybe lower income,” he says.
Supporters say that even families without much disposable income can make use of 529 plans – and should, given the rising cost of college.
[Check out tips for low-income students on paying for college.]
“Families are struggling and having to make really …