White House Urges States to Make College-Savings Plans More Usable

September 09, 2009

Obama-administration officials today urged states to change their college-savings plans so more people would be encouraged to use them.

The officials called for changes in those plans, commonly called Section 529 plans, as part of a meeting of the White House Task Force on Middle Class Families that was held at Syracuse University. The meeting focused on how to make college more accessible and affordable for lower- and middle-class families.

Administration officials also today released a study that provided new analysis of President Obama's plan to simplify the Free Application for Federal Student Aid, known as the Fafsa, and a report that examined barriers to higher education.

The 529 savings plans allow families to set aside money for college in tax-free accounts. The plans vary from state to state, although many plans permit out-of-state investors to participate.

In a report, the Treasury Department recommended that states close a loophole in the current system by changing how the cap on contributions to the plans is set. Under the current system, caps are set per beneficiary per state. Administration officials instead want one overall cap to be set per beneficiary so that people do not take advantage of the tax benefits by spreading millions of dollars of savings in many different states' plans.

The department also called for the elimination of what it called the plans' "home-state bias," in which states provide tax benefits to families who put money in in-state funds but do not provide the same advantages to residents who invest in other states' savings plans instead. Treasury officials also urged all states to offer a type of investment known as age-based index funds in their savings plans.

The recommendations are meant "to encourage broader use, to make them cheaper, and to make them safer," the treasury secretary, Timothy Geithner, said at today's event at Syracuse.

Meanwhile, the report on the federal student-aid form, which was prepared by the White House Council of Economic Advisers and the National Economic Council, found that the administration's proposal to simplify the Fafsa formula by relying on tax information and eliminating some questions about assets would make the application easier for families to complete while having little effect on students' eligibility for Pell Grants.

Speaking at Syracuse about the proposed changes in the Fafsa form, Vice President Joseph R. Biden, Jr. recalled his own experiences filling out the forms with his three children.

"We're going to make the process easier and not more difficult," he said. "We should make the aid application work for you and not against you."