Imagine you’ve just retired after years of hard work and saving. You’ve maxed out your employee contributions to your retirement accounts and saved up for a tax-advantaged payday in your IRA. Delighted at the opportunity to enjoy the fruits of your years of saving, you go to spend your retirement savings on your dream property, vacation, or a prudent investment in a hobby to support you in your waning years.
But you receive a notice from the IRS. It turns out you could only spend your retirement account on a handful of accredited retirement communities. You don’t want to go to these facilities—they’re expensive and outside your retirement plans—so you have to pay a hefty tax to spend the money on other retirement expenses.
Such a regulation would be absurd, clear and obvious cronyism for the accredited retirement communities already getting billions in Medicare and government grants. It would also be patronizing toward you, the taxpayer.
But this is essentially the system that exists with the Section 529 Plan. 529 Plans are tax-advantaged savings and investment accounts that families set up to pay for tuition and education-related expenses for accredited degree programs. For most parents, the goal with a 529 is to save and help their young adult children start their careers—but only if that means attending an accredited college or university. If they want to help their young adult children self-educate, go through an apprenticeship, enter a coding boot camp, complete a training program, or start their own company, then they have to pay taxes on the money like any other savings account.
Why Are We Holding Young Adults Hostage?
This protected status for tuition savings may have made sense in the ’90s when Section 529 was introduced. Getting a degree from a four-year institution was the baby boomer party line for starting your career. That degree, while not cheap, could reasonably be paid down with increasing gains in wages. Most of the fastest-growing jobs of the new millennium required degrees. Plus, there weren’t many other good options available for smart young people to start their careers.
But 2019 isn’t 1996. Students spend less time on studies than two decades ago, pay three times as much, and get significantly less for it.
A four-year degree doesn’t come near guaranteeing a job, with more than 40 percent of recent college grads working in jobs that don’t require degrees (even in one of the best job markets in recent memory). Sixty-one percent of the projected fastest-growing jobs between 2014 and 2024 don’t require a degree. Average mid-career salaries break six-figures only for the graduates of the most elite universities, all according to Richard Vedder’s “Restoring the Promise.”
College tuition and textbooks outpace every other category in consumer price index, except for hospital services. While innovations in production and technology drove down the prices of your TVs, cellphones, and cars, universities built billion-dollar sports arenas, doled out massive contracts for luxury dorms, and set up entire departments of educrats paid multiple six figures to persecute wrongthink—all while paying salaries for professors less ideologically diverse than an Elizabeth Warren rally in Iowa.
With ballooning endowments and financial services companies inside them, the best universities in the country teach as a tertiary function of being a hedge fund with real estate attached. Education is an afterthought. It’s time to end this charade.
A Tweak to 529 Plans Could Free Young People’s Futures
One of the quickest and least-reactionary ways to do this would be to expand the Section 529 Plan to make it more like a standard IRA.
Make spending 529 Plan contributions like spending an IRA, except rather than waiting until a specific age, the money can go tax-free to any initiative, program, project, or investment that helps a young person get started in his or her career. Congress has already okayed 529 Plan expansions for K-12; now we just need to extend that to non-college career opportunities.
The point of a college degree is to signal basic competence and a few traits that employers look for. There are plenty of other ways to create, substitute, or side-step that signal.
Let families spend their savings on apprenticeship programs that teach students real skills to start their careers. This would give a boost to a burgeoning market of jobs programs that are incentivized to generate results for students, unlike universities.
Let families spend the money on self-directed education opportunities. A young person could use the 529 savings to move out on his own and work at the entry-level rung of a company he likes, instead of moving to a university to study underwater basket weaving (while taking on debt).
Young people could use the money to self-fund a gap year studying a trade or exploring new cultures. Or they could use it to support themselves as they shadow professionals they admire to get a better sense of which industry they want to enter, instead of floundering for years.
Let families use the 529 savings to support young entrepreneurs and their businesses. There’s no reason why a small angel investment in your young son’s startup should be more heavily penalized by the IRS than sending him to a university.
Loosening Restrictions Is Politically Feasible
Keeping the 529 Plan in place but expanding it incentivizes families to think seriously about their futures, their children’s futures, and how they can build towards the next generation. And it’s well within the Overton Window of tax reform in a center-right country like the United States.
It reeks neither of tax cuts for the rich nor an anarcho-capitalist dream of abolishing income taxes outright. It’s a minor tweak to an existing policy that can free families and young people up to have slightly more choice, instead of being funneled into a failing system that will leave them laden with debt.
To the extent that policy can encourage spending or saving, it should lower time preferences and help make the decision to defer gratification easier. This precept governs sound monetary policy, sound financial planning, and sound standards of justice.
It’s also already reflected in our capital gains tax policy—short-term capital gains (profits from sales of assets held for a year or less) typically face a higher tax rate than long-term capital gains. It’s good to invest in the long-term future. Our capital gains policy reflects the importance of investing in financial capital for the long-haul; expanding the 529 Plan would do similarly for investments in human capital.
It’s time to update tax policy to reflect how careers actually get started in 2019. Universities hold a shrinking share of the career-launching market. The IRS shouldn’t artificially stack the deck in their favor.