Ohio lawmakers hope to reduce record student loan debt with a sweeter tax deal to entice families to save for higher education.
Ohio college graduates borrowed an average $29,037 in 2012 — a record amount that ranked the state ninth in the nation for student debt , according to the Project on Student Debt.
State Sen. Shannon Jones, R-Springboro, said there is no single solution to the problem, but her new bill aims to offer at least one incentive to invest instead of borrow: by raising the tax deduction Ohioans get for using the state’s CollegeAdvantage 529 savings plan.
Jones’ bill proposes increasing the maximum annual state income tax deduction to $10,000 from its current $2,000 per child for investing in the plan — which would bring Ohio more in line with what its neighboring states offer.
“When you look at the other states that surround Ohio, Ohio is woefully behind the times,” she said.
“Many other states have a more robust program that provides opportunities and advantages to families who save for college,” Jones said.
‘Putting money away’
College savings plan — named 529 after the section of the Internal Revenue Code that created them — are about 25 years old, but they are still largely misunderstood, said Betty Lochner, chair of the College Savings Plans Network.
“There’s still a lot of families that don’t know about them or think they’re complicated and hard to use, which is really kind of a myth about these programs,”she said. “It’s really all about putting money away.”
Lochner said the savings plans are valuable tools because earnings used on education are not taxed.
Among their other benefits: The accounts can be used at almost any accredited college or trade school in the United States, they are eligible for gift tax exclusion and they are transferable if intended beneficiary decides not to go to college, Lochner said. Account holders do pay fees and can decide to invest based on their child’s age or to have more control.
Lochner said saving is important because the cost of college continues to rise, especially for middle-income families who don’t qualify for federal financial aid.
“If you have a newborn, it could be upwards of $100,000 by the time your child goes to school,” Lochner said.
Tuition alone has increased 1,120 percent in 35 years, roughly one generation, according to national statistics.
‘A head start’
A record number of Americans are using the plans, but still only 17 percent of families did so last year, according a report by Sallie Mae, a large private loan lender.
The average account balance was $18,013 – enough to cover about a year’s tuition, fees, room and board, according to the latest report from Lochner’s group.
A family that starts saving just $10 a week when their baby is born could have $16,071 in their account by the time that child enters college, according to Ohio’s online calculator.
Jayna “Nickey” Brown was handed information on 529 college savings plans at the hospital when she had her first daughter, Eden. But she thought: “It’s a little early to be thinking about this. She was just born.”
“We were just getting over the mentality of the whole economic plunge that we had taken in 2008 and how people’s retirements and investments had just got milked,” she said. “We were very nervous.”
But by the time Eden turned 2, Brown and her husband were comfortable enough to invest.
“It took us asking questions and it took us reading up on it… and reading what the pros and cons are,” she said.
They started with $25 a month. Now the couple has two daughters, Eden age 6 and Elise age 4 and they contribute $100 a month to the account.
Both parents are still paying their own students loans and hope to have the balance forgiven by the time their daughters enter college.
Brown said she would like to have $60,000 in the account by the time Eden turns 18.
“We accepted the fact that this investment will not be guaranteed to pay their entire college,” said Brown, who works as an assistant registrar at Clark State Community College. “I just thought it would be nice if I could at least give them a head start.”
The cost for a four-year degree will likely be $160,000 by the time Eden enters a college, Brown said she was told when they started the account. Brown went through PNC Bank to start her daughters’ account.
“I think anyone who is considering it, it’s very important to research it and be comfortable with it,” she said. “You don’t want to just throw somebody your money and hope for the best.”
Along with the tax deduction, Jones’ Senate Bill 244, introduced with Sen. Randy Gardner. R-Bowling Green, would create a task force to examine the cost of college.
It’s not her first attempt to get the increased deduction. She put the idea forward in the spring as part of the larger tax reform, she said, but that effort failed.
This bill — which was co-sponsored by 12 others, including Sens. Bill Beagle, R-Tipp City; Peggy Lehner, R–Kettering; and Chris Widener, R-Springfield — stands alone.
“I really feel like my colleagues are open to this conversation,” Jones said. “I think this is an important priority.”
The executive director of the Ohio’s plan, Paul Paeglis, said he is “pleased” that the change is being debated.
“While an increased tax deduction could be an incentive for some families to save more for college, this is an issue that has to be weighed in the context of overall state tax policy,” Paeglis, of the Ohio Tuition Trust Authority, said in a statement. His group declined an interview.
Beagle acknowledged that enacting a larger tax deduction can be difficult during tight economic times when the state needs tax dollars for essential services, but said Ohio should consider the change because the state has to compete for college students and educated workers.
“We can’t be making decisions in a vacuum,” Beagle said. “We need to consider what others states around us are doing because ours is a competitive environment.”
Use an online calculator to see how much a 529 account can grow based on how much you want to contribute at MyDaytonDailyNews.com
Ohio’s CollegeAdvantage 529 savings plan
- Open an account with as little as $25
- Use the money at almost any accredited college in the country
- Don’t pay state or federal taxes on earnings used for college
- Get a deduction on your taxable income
- Or get a gift tax exclusion when grandparents contribute
- Anyone — a grandparent or friend — can contribute to the account
- Account can be transferred to another person if beneficiary decides not to go to college