oversight

Higher Education: A Small Percentage of Families Save in 529 Plans

Published by the Government Accountability Office on 2012-12-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States Government Accountability Office


GAO             Report to the Chairman, Committee on
                Finance, U.S. Senate




                HIGHER EDUCATION
December 2012




                A Small Percentage of
                Families Save in 529
                Plans




GAO-13-64
                                           December 2012

                                           HIGHER EDUCATION
                                           A Small Percentage of Families Save in 529 Plans

Highlights of GAO-13-64, a report to the
Chairman, Committee on Finance, U.S.
Senate




Why GAO Did This Study                     What GAO Found
Paying for college is becoming more        A small percentage of U.S. families saved in 529 plans in 2010, and those who
challenging, partly because of rising      did tended to be wealthier than others. According to the Survey of Consumer
tuition rates. A college savings plan      Finances (SCF), less than 3 percent of families saved in a 529 plan or Coverdell
can be an option to help meet these        Education Savings Account (Coverdell)—a similar but less often used college
costs. To encourage families to save       savings vehicle also included in the SCF. While the economic downturn may
for college, earnings from 529 plans—      have reduced income available for education savings, even among those families
named after section 529 of the Internal    who considered saving for education a priority, fewer than 1 in 10 had a 529 plan
Revenue Code—grow tax-deferred             (or Coverdell). Families with these accounts had about 25 times the median
and are exempt from federal income
                                           financial assets of those without. They also had about 3 times the median income
tax when they are used for qualified
                                           and the percentage who had college degrees was about twice as high as for
higher education expenses. In fiscal
year 2011, the Department of the
                                           families without 529 plans (or Coverdells).
Treasury estimated these plans             States offer consumers a variety of 529 plan features that, along with several
represented $1.6 billion in forgone        other factors, can affect participation. Some of the most important features
federal revenue. Managed by states,        families consider when choosing a 529 plan are tax benefits, fees, and
over one hundred 529 plan options          investment options, according to experts and state officials GAO interviewed.
were available to families nationwide      These features can vary across the state plans. For example, in July 2012, total
as of July 2012. The number of 529         annual asset-based fees ranged from 0 to 2.78 percent depending on the type of
plan accounts and the amount invested
                                           plan. 529 plan officials and experts GAO interviewed said participation is also
in them has grown during the past
                                           affected by families’ ability to save, their awareness of 529 plans as a savings
decade. GAO was asked to describe
(1) the percentage and characteristics     option, and the difficulty in choosing a plan given the amount of variation
of families enrolling in 529 plans, (2)    between plans (see fig. 1). Selected states, however, have taken steps to
plan features and other factors that       address these barriers. For example, to address families’ ability to save,
affect participation in 529 plans, and     particularly for low-income families, some states have adopted plans that include
(3) the extent to which savings in 529     less risky investments, have low minimum contributions, and match families’
plans affect financial aid awards. GAO     contributions.
analyzed government data, including
                                           Factors that Affect 529 Plan Participation
the SCF. This survey’s 529 plan data
are combined with Coverdells, so the
SCF estimates used in the report
include both 529 and Coverdell data.
GAO also analyzed National
Postsecondary Student Aid Study data;
conducted interviews with federal and
state officials, industry and academic
experts, and state and institutional
higher education officials; reviewed
529 plan and Department of Education
documents; conducted a literature
review; and reviewed relevant federal      Savings in 529 plans affect financial aid similarly to a family’s other assets. For
laws, regulations, and guidance.           federal aid, a family’s assets affect how much it is expected to contribute to the
                                           cost of college. If the amount of those assets exceeds a certain threshold, then a
What GAO Recommends                        percentage is expected to be used for college costs. For example, for students
GAO is not making any                      who are dependent on their parents, the percentage of parental assets, including
recommendations in this report.            savings in 529 plans, that the family may be expected to contribute ranges from
                                           2.64 to 5.64 percent. Many states and selected institutions also treat 529 plan
View GAO-13-64. For more information,      savings the same as other family assets. However, a few states provide them
contact Michelle Sager, (202) 512-6806,
sagerm@gao.gov                             with special treatment, such as exempting those funds from their financial aid
                                           calculation.
                                                                                        United States Government Accountability Office
Contents


Letter                                                                                   1
               Background                                                                5
               Few Families Have 529 Plans and Those Who Do Tend to Be
                 Wealthier                                                             14
               States’ 529 Plan Features and Other Factors Can Affect
                 Participation                                                         21
               Savings in 529 Plans Affect Financial Aid the Same as Other Assets      34
               Concluding Observations                                                 41
               Agency Comments                                                         42

Appendix I     Objectives, Scope, and Methodology                                      43



Appendix II    Free Application for Federal Student Aid, 2012-2013                     52



Appendix III   GAO Contacts and Staff Acknowledgments                                  62



Tables
               Table 1: Estimates of Selected Characteristics of College Students’
                        Families (from NPSAS) and Families with and without 529
                        Plans (from SCF)                                               20
               Table 2: Fee Ranges (Percent) for College Savings Plans, Direct-
                        Sold and Advisor-Sold                                          24


Figures
               Figure 1: 529 Plan Timeline and Assets Invested                           7
               Figure 2: 529 Plan Account Growth                                         8
               Figure 3: FAFSA Questions on Student and Parent Assets,
                        Including 529 Plans                                            13
               Figure 4: Distribution of Income for Families with and without 529
                        Plans or Coverdells (from SCF)                                 17
               Figure 5: Factors that Affect 529 Plan Participation                    26
               Figure 6: Expected Family Contribution from Parents’ Assets for
                        Dependent Student                                              36
               Figure 7: FAFSA Questions on Student Untaxed Income                     38



               Page i                                                   GAO-13-64 529 Plans
Abbreviations

Coverdells                 Coverdell Education Savings Accounts
CSPN                       College Savings Plan Network
Education                  Department of Education
EFC                        expected family contribution
EGTRRA                     Economic Growth and Tax Relief Reconciliation Act
                             of 2001
FAFSA                      Free Application for Federal Student Aid
FDIC                       Federal Deposit Insurance Corporation
Federal Reserve            Board of Governors of the Federal Reserve System
IRS                        Internal Revenue Service
MSRB                       Municipal Securities Rulemaking Board
NBER                       National Bureau of Economic Research
NPSAS                      National Postsecondary Student Aid Study
SEC                        Securities and Exchange Commission
SCF                        Survey of Consumer Finances
SOI                        Statistics of Income
Treasury                   Department of the Treasury


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Page ii                                                               GAO-13-64 529 Plans
United States Government Accountability Office
Washington, DC 20548




                                   December 12, 2012

                                   The Honorable Max Baucus
                                   Chairman
                                   Committee on Finance
                                   United States Senate

                                   Dear Mr. Chairman:

                                   While median family income decreased between 2005 and 2011, college
                                   tuition and fees increased at an average annual rate of 6 percent, more
                                   than double the rate of inflation. As families look for ways to prepare for
                                   these rising costs, their options include saving in advance; paying for
                                   expenses at the time they occur out-of-pocket and/or through grants and
                                   scholarships; or financing the cost through educational loans that they
                                   repay at a later date. Loans have become an increasingly popular option
                                   to cover these costs. 1 However, with college loan balances now
                                   estimated at $914 billion, more than total credit card debt, 2 financing a
                                   large portion of college costs potentially creates a future financial burden
                                   for students and their families. To encourage people to save for college
                                   expenses in advance, Congress, in 1996, added section 529 to the
                                   Internal Revenue Code, which authorized state qualified tuition programs,
                                   otherwise known as 529 plans. 3 These plans are available in two forms—
                                   prepaid tuition plans and college savings plans. In prepaid tuition plans,
                                   participants buy tuition credits or certificates on behalf of a designated




                                   1
                                     The College Board reported that the relative stability of the ratio of grant to loan amounts
                                   over time indicates that loans have not replaced grants. However, grant aid often fails to
                                   increase rapidly enough to fill the growing gap between the costs of attending college and
                                   the ability of students and families to pay those costs. College Board Advocacy and Policy
                                   Center, Trends in Student Aid 2011 (New York, NY: 2011).
                                   2
                                    Federal Reserve Bank of New York, Research and Statistics Group, Microeconomic
                                   Studies. Quarterly Report on Household Debt and Credit. (New York, NY: August 2012).
                                   Debt amount is as of second quarter 2012.
                                   3
                                    Small Business Job Protection Act of 1996, Pub. L. No. 104 -188 § 1806, 110 Stat.
                                   1755, 1895, codified at 26 U.S.C. § 529.




                                   Page 1                                                                  GAO-13-64 529 Plans
beneficiary, who can use them for qualified higher education expenses. 4
College savings plans allow for contributions to an account for the
purpose of paying a designated beneficiary’s qualified higher education
expenses. As of July 2012, more than one hundred 529 plan options have
been developed and are managed by states and the District of Columbia.
In 2011, there were more than 11 million accounts with assets of $167
billion (in 2012 dollars). 5

While there is no federal tax deduction for payments or contributions to
529 plans, which are made with after-tax dollars, plan earnings
accumulate tax-deferred and earnings included in withdrawals used to
pay for qualified higher education expenses are not taxed. This tax
expenditure cost the federal government an estimated $1.6 billion in
forgone revenue in fiscal year 2011. 6 We reported, in 2012, that higher
income households are more likely to have 529 plans and tend to benefit
more from these tax preferences because of their higher marginal tax




4
  Qualified higher education expenses include tuition, books, supplies, and equipment.
Costs for room and board are considered qualified education expenses if students are
enrolled at least half-time. Qualified higher education expenses also included expenses
paid or incurred in 2009 and 2010 for computer technology, equipment, or Internet access
and related services. Eligible educational institutions include colleges, universities,
vocational schools, or other postsecondary institutions eligible to participate in a federal
student aid program authorized by Title IV of the Higher Education Act of 1965, as
amended. This includes virtually all accredited, public, nonprofit, and for-profit
postsecondary institutions in the U.S.
5
 Data provided by the Financial Research Corporation. Account numbers and assets are
as of year-end 2011.
6
  Tax expenditures are reductions in a federal taxpayer’s tax liability that result from
special credits, deductions, exemptions and exclusions, deferrals of tax liability, and
preferential tax rates. The federal revenue forgone may be viewed as spending channeled
through the tax code. This estimate by the Department of the Treasury (Treasury) includes
both college savings plans and prepaid plans. For fiscal year 2011, the Joint Committee
on Taxation reported revenue loss estimates of $500 million for college savings plans and
less than $50 million for prepaid plans. Revenue loss estimates do not incorporate any
behavioral responses and, thus, do not necessarily represent the exact amount of revenue
that would be gained if a specific tax expenditure was repealed.




Page 2                                                                 GAO-13-64 529 Plans
rate. 7 We have recommended in the past that tax expenditures be
periodically reviewed to determine their effectiveness in achieving specific
policy goals, particularly given the nation’s long-term fiscal imbalance. 8

In response to your request to examine the extent to which 529 plans
help families of all income levels save for college and how these plans
affect student financial aid, we reviewed (1) the percentage and
characteristics of families enrolling in 529 plans, (2) the plan features and
other factors that affect participation in 529 plans, and (3) the extent to
which savings in 529 plans affect financial aid awards.

To answer these research objectives, we analyzed government and
industry data; conducted interviews with federal and state officials,
industry representatives and academic experts, as well as state and
institutional higher education officials; reviewed 529 plan and Department
of Education (Education) documents; conducted a literature review; and
reviewed relevant federal laws, regulations, and guidance. We assessed
the reliability of the data we used by reviewing documentation,
interviewing knowledgeable officials, and conducting electronic testing on
relevant data fields. We found the data we reviewed reliable for the
purposes of our analyses.

To determine the percentage and characteristics of families enrolling in
529 plans, we reviewed data from the 2010 Survey of Consumer
Finances (SCF); the 2007-2008 National Postsecondary Student Aid
Study (NPSAS), which was the most recent available and which we
adjusted to 2010 dollars; and 2007-2010 Statistics of Income (SOI)
federal tax data. Our analysis of data from SCF, NPSAS, and SOI are


7
  GAO, Higher Education: Improved Tax Information Could Help Families Pay for College,
GAO-12-560 (Washington, D.C.: May 18, 2012). The analysis used in this report also
included Coverdell Education Savings Accounts (Coverdells). Similar to 529 plans,
Coverdell accounts allow families to save for education expenses. Account earnings
accumulate tax-deferred and earnings included in withdrawals used to pay for qualified
education expenses are not subject to federal tax. Unlike 529 plans, (1) Coverdell
contributors must generally have a modified adjusted gross income of less than $110,000
per year ($220,000 in the case of a joint return), (2) Coverdells have annual contribution
limits of $2,000 that must generally stop when a beneficiary reaches 18 years of age, and
(3) Coverdells can be used for qualified elementary, secondary, or postsecondary
expenses typically for individuals under age 30.
8
  GAO, Government Performance and Accountability: Tax Expenditures Represent a
Substantial Federal Commitment and Need to Be Reexamined, GAO-05-690
(Washington, D.C.: Sept. 23, 2005).




Page 3                                                                GAO-13-64 529 Plans
subject to sampling errors because these data sets are based on
samples. Unless otherwise noted, all percentage estimates based on
SCF, NPSAS, and SOI have 95 percent confidence intervals that are
within 5 percentage points of the estimate itself, and all numerical
estimates other than percentages have 95 percent confidence intervals
that are within 5 percent of the estimate itself. Using SCF data, we
generated estimates of the characteristics of households—including
wealth (financial assets), income, education, and race/ethnicity—enrolled
in 529 plans or Coverdell Education Savings Accounts (Coverdells) 9 and
compared those to characteristics of families not enrolled in these plans.
Our estimates are based on analyses from the restricted SCF dataset and
were conducted with assistance from officials at the Board of Governors
of the Federal Reserve System (Federal Reserve). We also developed a
profile of the general college population using NPSAS data. In addition,
we analyzed taxpayer data from SOI and used a microsimulation model
from the National Bureau of Economic Research to understand the extent
to which taxpayers use withdrawals (known as distributions) from 529
plans for qualified educational expenses and how the tax savings from
these plans are distributed across income levels.

To understand the features and factors that affect participation, we
interviewed officials from five state 529 plans (Louisiana, Michigan,
Pennsylvania, Utah, and Virginia), conducted a literature review, and
spoke with academic researchers, industry regulators, financial services
companies, financial experts, and consumer interest groups. While we
selected the five state plans to represent variety in the types of plans
offered, benefits, and geographic location, our findings cannot be
generalized to all 529 plans. We also analyzed College Savings Plan
Network (CSPN) data to provide a national overview of plan features and
benefits. 10 To provide information on the percentage of students who
receive financial aid and the median award amount, we analyzed NPSAS
data. To assess efforts by states to disclose 529 plan information to
consumers, we reviewed disclosure documents from selected states as
well as CSPN disclosure principles.



9
  The SCF codes responses for 529 plans and Coverdells together. Survey officials said
respondents did not always distinguish between the two account types; therefore, we were
unable to separate these responses because of data reliability concerns.
10
   CSPN is an affiliate to the National Association of State Treasurers and serves as a
clearinghouse for information on 529 plans. Plan data are as of July 2012.




Page 4                                                                GAO-13-64 529 Plans
                       We assessed the extent to which savings in 529 plans affect federal
                       financial aid awards by reviewing relevant federal laws, regulations, and
                       guidance, and interviewing Education officials. In addition, we analyzed
                       NPSAS data to determine the extent to which a family’s total assets
                       affected the federal expected family contribution to college expenses. To
                       understand how savings in 529 plans affect state and institutional
                       financial aid, we interviewed six state financial aid offices and six
                       institutions of higher education. We selected states that indicated on a
                       National Association of State Student Grant and Aid Programs survey
                       that they used a financial aid formula other than the federal methodology
                       in their primary needs analysis and/or provided special treatment for state
                       529 plans. We selected an institution in each of the six states that was
                       reported as using the College Board’s PROFILE or another institutional
                       form, in addition to the Free Application for Federal Student Aid, to gather
                       information used in making decisions regarding institutional financial
                       aid. 11 To obtain an institutional perspective beyond the six schools, we
                       interviewed officials from national organizations representing community
                       colleges, private nonprofit and public colleges and universities, and for-
                       profit schools. A more detailed explanation of our methodology is
                       available in appendix I.

                       We conducted this performance audit from November 2011 to December
                       2012 in accordance with generally accepted government auditing
                       standards. Those standards require that we plan and perform the audit to
                       obtain sufficient, appropriate evidence to provide a reasonable basis for
                       our findings and conclusions based on our audit objectives. We believe
                       that the evidence obtained provides a reasonable basis for our findings
                       and conclusions based on our audit objectives.



Background
History of 529 Plans   529 plans are a college savings vehicle that originated in the states. In
                       1986, Michigan created the Michigan Education Trust to operate what is



                       11
                          The College Board is a not-for-profit organization that provides college students with
                       financial aid support and scholarships. It also conducts research and advocacy on behalf
                       of students, educators, schools, and colleges. The PROFILE is a form developed by the
                       College Board to help institutions gather information used to award nonfederal student aid
                       funds.




                       Page 5                                                               GAO-13-64 529 Plans
generally considered the first state prepaid tuition plan. In 1996, Congress
enacted Section 529 of the Internal Revenue Code, setting out
requirements that state 529 plans must meet to be exempt from federal
tax. The Economic Growth and Tax Relief Reconciliation Act of 2001
included a provision making earnings included in distributions from 529
plan accounts entirely tax-exempt as long as they are used to pay for
qualified higher education expenses. 12 For other key legislative actions
and the value of assets invested in these plans, see fig. 1.




12
  Pub. L. No. 107-16, § 402, 115 Stat. 38, 60. Previously, earnings had been allowed to
grow on a tax-deferred basis, but were taxed upon distribution to pay for qualified
education expenses.




Page 6                                                              GAO-13-64 529 Plans
Figure 1: 529 Plan Timeline and Assets Invested




                                        Notes:
                                        a
                                          Michigan v. United States, 40 F.3d 817 (6th Cir. 1994).
                                        b
                                          We chose to present account data starting in 2001 because the federal tax-exempt status for
                                        distributions was granted in 2001 and data were not available for all previous years.
                                        c
                                          Pension Protection Act of 2006, Pub. L. No. 109-280, tit. XIII § 1304, 120 Stat. 789, 1109.


                                        The number of 529 plan accounts has also increased since the plans
                                        were granted expanded federal tax advantages in 2001 (see fig. 2).




                                        Page 7                                                                       GAO-13-64 529 Plans
                           Figure 2: 529 Plan Account Growth




                           a
                            We did not report prepaid tuition account data for 2010 and 2011 because the method of collecting
                           these data changed in 2009.



Federal Requirements for   529 plans are a state-sponsored investment or savings vehicle whose
529 Plans                  purpose is to encourage people to save for college. 13 Contributions to 529
                           plans are made with after-tax dollars and are not deductible for federal tax
                           purposes. Annual contributions in excess of $13,000 are generally subject
                           to federal gift taxes. 14 Total contributions may not exceed the amount
                           necessary to provide for the qualified education expenses of the


                           13
                              One additional prepaid plan is not run by a state. The Private College 529 Plan
                           provides a prepaid tuition plan at more than 270 participating private colleges and
                           universities. The Economic Growth and Tax Relief Reconciliation Act of 2001 amended
                           section 529 to provide that one or more eligible educational institutions could establish
                           and maintain a prepaid tuition plan. Prior to that amendment, qualified tuition programs
                           were defined as those established and maintained by a state or state agency or
                           instrumentality.
                           14
                             Contributors may elect to treat contributions between $13,000 and $65,000 as having
                           been made over a 5 calendar-year period without being subject to federal gift taxes.




                           Page 8                                                                       GAO-13-64 529 Plans
beneficiary, which is determined by each state; however, individuals may
open 529 plan accounts in multiple states. 15 Earnings on contributions
grow tax-deferred. When a distribution is made from a 529 plan, the
earnings portion is tax-exempt as long as it is used to pay for qualified
education expenses. 16 Taxpayers must report to the Internal Revenue
Service (IRS) whether the distribution was for qualified higher education
expenses. Distributions not used for qualified higher education expenses
can be made to either the account owner or beneficiary, but the portion of
the nonqualified distribution consisting of investment earnings is taxable
and subject to an additional 10 percent penalty. 17 The federal penalty
does not apply in some circumstances, for example if the distribution was
considered nonqualified because the beneficiary died or received a
scholarship.

While section 529 provides that account owners and beneficiaries may
not directly or indirectly control how contributions or earnings are
invested, in 2001, IRS issued a notice setting out a rule permitting a
change in investment strategy once per year and upon a change in the
designated beneficiary of the account. 18 For 2009 only, this was
increased to twice per year. 19

There are few federal restrictions on 529 plan participation. For example,
there are no income limits and almost anyone can initially be named as a
beneficiary—an individual may open a 529 plan account for a child,
grandchild, friend, spouse, or for themselves. Further, the 529 plan
account owner may change the beneficiary at any time, though the


15
   According to CSPN data, overall contribution limits ranged from $235,000 to $400,000
as of July 2012. However, there is no limit on the number of accounts for which an
individual can be named the beneficiary. According to a 2009 Treasury report, An Analysis
of Section 529 College Savings and Prepaid Tuition Plans, a beneficiary can have
accounts in as many as 44 states, with effectively no limit on the overall 529 account
balance.
16
  An American Opportunity or Lifetime Learning Tax Credit can be claimed in the same
year the beneficiary takes a tax-exempt distribution from a 529 plan as long as the same
expenses are not used for both benefits.
17
  Qualified education expenses must be reduced by any tax-free educational assistance,
such as the tax-free part of scholarships and fellowships, veterans’ education assistance,
Pell grants, and employer-provided education assistance.
18
     IRS Notice 2001-55.
19
     IRS Notice 2009-1.




Page 9                                                                GAO-13-64 529 Plans
                         subsequent beneficiary must be a member of the family of the original
                         beneficiary in order for this change to be tax-exempt. 20


529 Plan Operation and   Because 529 plans are state-sponsored investments, states determine
Features                 whether and what type of plans to offer (i.e., prepaid tuition or savings) as
                         well as the eligibility criteria (for example, at the time of application
                         prepaid tuition plans may require either the account owner or beneficiary
                         to be a resident of the state administering the plan whereas residents and
                         nonresidents can invest in most states’ college savings plans);
                         administrative and investment fees; and associated state tax benefits.
                         Almost all states offer a college savings plan. 21 In these plans, individuals
                         purchase interests or shares in a trust established by the state. In most
                         cases, the trust assets are invested in mutual funds. The shares in
                         college savings plans can be sold directly by the state or through an
                         external program manager hired by the state (direct-sold) as well as
                         through a financial advisor or broker (advisor-sold). College savings plans
                         may offer a number of investment options, which often include stock
                         mutual funds, bond mutual funds, and money market funds. These
                         investment options can vary in terms of risk and return, ranging, for
                         example, from investments that are insured by the Federal Deposit
                         Insurance Corporation (FDIC) to options that are almost completely
                         invested in aggressive-growth funds. Many plans offer age-based
                         portfolios that shift automatically into more conservative investments as
                         the beneficiary approaches college age. Fifteen states also offer prepaid
                         tuition plans to their state residents. 22 To help run their plans, states may
                         employ marketing staff, advisors, financial consultants, or other experts.




                         20
                             A member of the beneficiary’s family is defined as including a father, mother, brother,
                         sister, child, grandchild, niece/nephew, son/daughter-in-law, spouse of any individual
                         listed above, and a first cousin, among others.
                         21
                           Wyoming no longer operates its own plan and has entered into an agreement with
                         Colorado’s college savings plan whereby Wyoming residents participate under the same
                         terms as Colorado residents. Washington only offers a prepaid tuition plan.
                         22
                           As of July 2012, of the 15 states with prepaid tuition plans, 3 are no longer accepting
                         new enrollees. Kentucky and South Carolina’s prepaid tuition plans are currently closed to
                         new enrollments. Tennessee also closed its prepaid tuition plan to new enrollees and
                         contributions in 2010 due to the cost of tuition increasing faster than investment returns.
                         However, it launched a new college savings plan in September 2012.




                         Page 10                                                                 GAO-13-64 529 Plans
                   Some states offer a variety of tax advantages that can include a state
                   deduction or non-refundable credit for plan contributions and tax-deferred
                   earnings. 23 These benefits may apply only to residents who make
                   contributions to their own state’s plan or, in a few states, may include
                   contributions made to other states’ plans. 24


Plan Disclosures   Although most 529 college savings plans have been modeled after
                   mutual funds, 529 plans are regulated differently than mutual funds under
                   the federal securities laws because they are regulated as municipal
                   securities. 25 As municipal securities, 529 plans are exempt from the
                   registration and reporting requirements of the federal securities laws. 26
                   However, broker-dealers selling 529 plans (advisor-sold plans) must
                   comply with the rules of the Municipal Securities Rulemaking Board
                   (MSRB). 27 Specifically, MSRB requires broker-dealers who sell 529 plans
                   to follow certain guidelines, such as having reasonable grounds to believe
                   that the recommended product is suitable for the customer; disclosing
                   certain information, such as plan fees and state tax implications; following
                   certain requirements when advertising; and posting disclosure documents
                   on its Electronic Municipal Market Access Website. 28 However, MSRB
                   rules do not apply to state issuers when they market their 529 plans


                   23
                      Tax credits reduce tax filers’ income tax liability on a dollar-for-dollar basis. A
                   nonrefundable credit can reduce the amount of taxes owed (tax liability) to zero but not
                   below. A refundable credit can reduce the tax liability to zero and the remaining credit is
                   paid to the taxpayer as a refund. Tax deductions permit tax filers to subtract the applicable
                   contribution amount from income that would otherwise be taxable. Therefore, deductions
                   reduce filers’ tax liability less than credits for any given amount claimed.
                   24
                      Arizona, Kansas, Maine, Missouri, and Pennsylvania extend the same state tax benefits
                   to residents who invest in either their own state’s 529 plan or another state’s plan.
                   25
                      Municipal securities are issued by states and political subdivisions or agencies of
                   states. Prepaid tuition plans are generally not considered municipal securities.
                   26
                     See Section 3(a)(2) of the Securities Act of 1933 and section 3(a)(29) of the Securities
                   Exchange Act of 1934. Disclosures provided in connection with the sale of 529 plans are,
                   however, subject to the antifraud provisions of the federal securities laws.
                   27
                     MSRB establishes standards of fair practice, disclosure, and suitability and professional
                   qualifications for broker-dealers.
                   28
                     While MSRB has the authority, subject to Securities and Exchange Commission (SEC)
                   approval, to establish such standards, it does not enforce its own rules. MSRB rules are
                   enforced against broker-dealers by the Financial Industry Regulatory Authority, a self-
                   regulatory organization that is subject to SEC oversight, and by SEC.




                   Page 11                                                                GAO-13-64 529 Plans
                        directly to the investor without the assistance of a broker-dealer (direct-
                        sold plans). In 2004, in response to concerns that 529 plan disclosures
                        were inadequate, CSPN, after working with the Securities and Exchange
                        Commission, the MSRB, and the National Association of Securities
                        Dealers, developed voluntary disclosure principles to be adopted by state
                        issuers on plan performance, fees, and state tax information, among
                        other things. These principles were designed to enhance investors’ ability
                        to compare information across plans. Since 2004, the principles have
                        been updated several times with the most recent update in May 2011.


Student Financial Aid   As authorized under Title IV of the Higher Education Act of 1965, as
                        amended, the Department of Education provides assistance to help
                        millions of students and families meet the costs of higher education
                        through grants, work-study, and loans. A substantial portion of this federal
                        financial aid is awarded based on the amount of a student’s financial
                        need, which is generally the difference between a student’s cost of
                        attendance and an estimate of his family’s ability to pay these costs,
                        known as the expected family contribution (EFC). In addition to the
                        student’s income and assets, parents’ income and assets are also used
                        to determine the student’s EFC unless the student is classified as
                        independent. Independent students have their income and assets
                        included in the EFC and their spouses’ income and assets, if applicable.
                        Several criteria are used to determine if a student is independent, such as
                        the student’s age, and if he or she is married or separated, enrolled in a
                        master’s or doctoral degree program, or serving on active duty in the
                        military, among other things.

                        To apply for federal financial aid, students and, in the case of dependent
                        students, parents submit information on income, assets, and the number
                        of children enrolled in college through the Free Application for Federal
                        Student Aid (FAFSA). This information is then used to determine the
                        student’s eligibility for federal student aid by calculating the EFC through
                        a process known as federal methodology, which is set out in statute. 29 In
                        terms of assets, figure 3 shows the information required 30 by the FAFSA


                        29
                          The methodology for determining the federal EFC is found in Part F of Title IV of the
                        Higher Education Act of 1965, as amended, codified at 20 U.S.C. §§ 1087kk – 1087vv.
                        30
                           Assets that are not required to be reported on the FAFSA include principal place of
                        residence, a family farm, family-owned small businesses, retirement plans, and whole life
                        insurance.




                        Page 12                                                              GAO-13-64 529 Plans
                                       regarding the net worth of students’ and parents’ investments, which
                                       includes savings in 529 plans along with other investments such as
                                       Coverdells, money market funds, stocks, and mutual funds (for a full copy
                                       of the FAFSA see app. II). 31

Figure 3: FAFSA Questions on Student and Parent Assets, Including 529 Plans




                                       States and institutions may also offer financial aid. To determine the
                                       amount of such aid, some states and institutions choose to gather
                                       information in addition to what is required by the FAFSA. One form used
                                       by some institutions is the College Board’s PROFILE form. The PROFILE


                                       31
                                            Prepaid plans are worth the refund value of the credits or certificates.




                                       Page 13                                                                   GAO-13-64 529 Plans
                          asks for information not included on the FAFSA, such as home equity and
                          medical expenses, as well as more detail about information that is
                          included on the FAFSA. The institutions may then use an individualized
                          institutional methodology to determine the student’s EFC for institutional
                          financial aid. 32



Few Families Have
529 Plans and Those
Who Do Tend to Be
Wealthier
A Small Percentage of     According to the 2010 Survey of Consumer Finances (SCF), less than 3
Families Have 529 Plans   percent of U.S. families had 529 plans 33 or Coverdells, a similar but less
                          often used education savings account. 34 Even among families who
                          acknowledged upcoming education expenses, 529 plans were not widely
                          used. Of the approximately 25 percent of families who said they expected
                          major education expenses in 5-10 years, about 7 percent of them had
                          529 plans or Coverdells. Similarly, of the approximately 18 percent of
                          families who reported saving for education was a priority, only about 9
                          percent had 529 plans or Coverdells. 529 plans are also less commonly




                          32
                            Institutional methodology is a College Board formula developed by financial aid
                          professionals, in consultation with economists, to measure a family’s ability to pay for
                          college. A basic principle of institutional methodology is the idea that a family’s capacity to
                          pay is a function of income and assets.
                          33
                             The SCF asks about survey respondents and members of their households (sometimes
                          referred to as primary economic units), which we refer to as families. About 88 percent of
                          families with 529 plans or Coverdells had children 25 years of age or younger living with
                          them. Among the approximately 39 percent of all families that had children under 25 living
                          with them, only about 6 percent had 529 plans or Coverdells.
                          34
                             The SCF combines responses for 529 plans and Coverdells. Because officials from the
                          Federal Reserve, the federal agency that sponsors the SCF, said respondents did not
                          necessarily distinguish between Coverdells and 529 plans, we did not separate the two
                          account types. However, the officials indicated that a larger share of SCF respondents
                          reported having 529 plans than Coverdells. Further, using SOI data, we estimate that in
                          2010 approximately 85 percent of tax filers who took a distribution from either a 529 plan
                          or a Coverdell reported distributions from a 529 plan while 14 percent reported
                          distributions from a Coverdell and 1 percent reported distributions from both.




                          Page 14                                                                  GAO-13-64 529 Plans
                            used than other savings vehicles among those saving for college. 35 For
                            example, a 2010 Sallie Mae survey found that most parents saved for
                            college in general savings accounts or certificates of deposit and, of those
                            who did invest, more used general investment vehicles than 529 plans. 36
                            Based on our analysis of SCF data, the median amount in 529 plan or
                            Coverdell accounts was about $14,700. 37


Families with 529 Plans     Families with 529 plans or Coverdells typically had much more wealth
Generally Have More         than families without these accounts, according to our analysis of SCF
Wealth and Education than   data. Based on our analysis of the 2010 SCF, we estimate that the
                            median financial asset 38 value for families with 529 plans or Coverdells
Those without 529 Plans     was about $413,500, which is about twenty-five times the median
                            financial asset value for families without 529 plans or Coverdells (about
                            $15,400). 39 For example, families with 529 plans or Coverdells had more
                            retirement assets than other families. Of families with 529 plans or




                            35
                              There are other vehicles with tax benefits that can be used for education savings. Such
                            vehicles include Coverdells, funds under the Uniform Gift to Minors Act and Uniform
                            Transfer to Minors Act, individual retirement accounts, and savings bonds.
                            36
                                Information is reported for parents of children younger than 18 who believed their child
                            is likely to attend college and who were saving for this purpose. The survey also found
                            that nearly a quarter of these parents saved for college in retirement savings accounts
                            such as a 401(k) or individual retirement account. Sallie Mae, How America Saves for
                            College: Sallie Mae’s National Study of Parents with Children under 18 Conducted by
                            Gallup (Reston, VA: 2010).
                            37
                               We are 95 percent confident that the median amount in these accounts was between
                            $9,300 and $20,100. Because Coverdells had annual contribution limits of $2,000 in 2010,
                            this estimate may understate the median amount in 529 plans. However, other data
                            sources have similar findings specific to amounts saved in 529 plan accounts. For
                            instance, in 2011 the College Savings Plan Network reported that the average amount in
                            529 savings plans was $15,492 in 2010. Unless otherwise noted, all SCF percentage
                            estimates have 95 percent confidence intervals within 5 percentage points of the estimate
                            itself.
                            38
                              Financial assets include, among other things, resources in 529 plans, checking and
                            savings accounts, stocks, bonds, and retirement accounts. See appendix I for more detail.
                            39
                               We are 95 percent confident that the median financial asset value for families with 529
                            plans or Coverdells was between $247,400 and $579,600. For families without 529 plans
                            or Coverdells, the 95 percent confidence interval is between $13,700 and $17,100.




                            Page 15                                                                 GAO-13-64 529 Plans
Coverdells, about 94 percent had retirement assets, 40 such as those in
401(k) accounts or traditional pensions. 41 In contrast, approximately 49
percent of families without 529 plans or Coverdells had these retirement
assets. Further, the median value of retirement assets was much greater
for those with 529 plans or Coverdells. Specifically, the median value in
retirement accounts was about $213,600 for families with 529 plans or
Coverdells, while the median value for families without 529 plans or
Coverdells was about $40,300. 42 A larger share of families with 529 plans
or Coverdells (27 percent) also believed they will have more than enough
retirement income from pensions and Social Security to maintain current
living standards than the share of families without 529 plans or Coverdells
(16 percent), which may put them in a better position to save for college. 43

Further, the median income of families with 529 plans or Coverdells was
about three times the median income of families without these accounts. 44
Specifically, families with 529 plans or Coverdells had median incomes of
about $142,400 per year compared to $45,100 for other families. 45
Moreover, we estimate that 47 percent of families with 529 plans or
Coverdells had incomes over $150,000, compared to 8 percent for




40
   For our purposes, retirement assets include those in defined contribution plans (e.g.
retirement savings plans such as a 401(k)), individual retirement accounts, and defined
benefit plans from which the participant has the option to borrow or withdraw for both the
SCF respondent and his/her spouse.
41
     We use the term ‘traditional pensions’ to refer to defined benefit plans.
42
   We are 95 percent confident that the amount of retirement assets for families with 529
plans or Coverdell accounts was between $149,700 and $277,500, while the amount for
families without these accounts was between $37,400 and $43,200.
43
  We are 95 percent confident that the percentage of families with 529 plans or Coverdell
accounts who believed they will have more than enough retirement income was between
19.9 and 33.9 percent. For families without 529 plans or Coverdells, the 95 percent
confidence interval was between 15.1 and 16.9 percent.
44
     In 2012, we reported similar findings using data from the 2007 SCF. GAO-12-560.
45
   Because Coverdell contributors must generally have had a modified adjusted gross
income of less than $110,000 per year ($220,000 in the case of a joint return) in 2010, this
estimate may understate the median income of families with 529 plans. We are 95 percent
confident that the median income for families with 529 plans or Coverdells was between
$125,400 and $159,400.




Page 16                                                                   GAO-13-64 529 Plans
families without these accounts (see fig. 4). 46 In 2009, Treasury reported
that participation in 529 plans is likely to increase with income, in part,
because the tax benefits and overall savings rates increase with
income. 47 (For more information see text box on 529 plan savings,
below).

Figure 4: Distribution of Income for Families with and without 529 Plans or
Coverdells (from SCF)




Notes: Numbers may not add to 100 percent due to rounding. Error bars in the graph display the 95
percent confidence intervals for these estimates. We are 95 percent confident that the percentage of
families with 529 plans or Coverdells who have incomes of $1 to $100,000 was between 21.9 and
37.1 percent, that those who have incomes of $100,001 to $150,000 was between 17.4 and 29.8
percent, and that those who have incomes over $150,000 was between 38.8 and 54.4 percent. We
are 95 percent confident that the percentage of families without 529 plans or Coverdells who have
incomes of $1 to $100,000 was between 81.5 and 83.3 percent, that those who have incomes of
$100,001 to $150,000 was between 8.3 and 9.7 percent, and that those who have incomes over
$150,000 was between 7.6 and 8.6 percent.



46
   We are 95 percent confident that that the percentage of families with 529 plans or
Coverdells who have incomes over $150,000 was between 38.8 and 54.4. For families
without 529 plans or Coverdells, the 95 percent confidence interval was between 7.6 and
8.6 percent.
47
  The Department of the Treasury, An Analysis of Section 529 College Savings and
Prepaid Tuition Plans: A Report Prepared by the Department of Treasury for the White
House Task Force on Middle Class Working Families (Washington, D.C.: September 9,
2009).




Page 17                                                                       GAO-13-64 529 Plans
     529 Plan Federal Tax Savings

     Using IRS taxpayer data and a microsimulation model from the National Bureau of
     Economic Research (NBER), we found that taxpayers with higher incomes both took
     larger distributions from 529 plans and received a larger tax benefit from those
     distributions (see table below). As we reported in 2012, 529 plan tax incentives are
     more beneficial to families with higher tax liabilities, in part, because these families
     have a higher marginal tax rate (see GAO-12-560).
     Distributions and Estimated Federal Tax Savings of 529 Plans in 2010 by Income

      Total income                                      Median distribution                  Median tax savings
      $1 to $100,000                                                       $7,491                               $561
      $100,001 to $150,000                                               $13,394                              $1,958
      Over $150,000                                                      $18,039                              $3,132
     Source: GAO analysis of IRS SOI 2010 data using NBER’s TAXSIM Model, a microsimulation model.

     Notes: We are 95 percent confident that in 2010: the median distribution was between $6,261 and $8,280 and
     the median tax savings was between $493 and $664 for taxpayers whose total income was between $1 and
     $100,000; the median distribution was between $10,327 and $16,110 and the median tax savings was between
     $1,587 and $2,456 for taxpayers whose total income was between $100,001 and $150,000; and the median
     distribution was between $16,280 and $20,107 and the median tax savings was between $2,858 and $3,415 for
     taxpayers whose total income was more than $150,000.




As higher-income families tend to have higher levels of education, it is
logical that the wealthier families who save in 529 plans or Coverdells
also have higher educational attainment than other families. Specifically,
about 91 percent of SCF respondents with 529 plans or Coverdells
indicated that either they or their spouse/partner had at least a college
degree, compared to about 44 percent of families without these accounts.
Further, because families with 529 plans have higher education levels,
children in these families may be more likely to attend college in the first
place as research shows that when parents have obtained a college
degree, their children are more likely to attend college. 48

Also, a larger proportion of respondents in families who had 529 plans or
Coverdells were non-minorities, according to our analysis of SCF data. 49
Specifically, about 84 percent of respondents whose families had 529


48
  For example, see OECD (2012), Education at a Glance 2012: OECD Indicators, OECD
Publishing. Accessed on September 11, 2012. http://dx.doi.org/10.1787/eag-2012-en.
49
   Research shows that racial or ethnic minorities are more likely to be low-income, which
is a risk factor that may be associated with less positive educational outcomes and can
affect educational achievement.




Page 18                                                                                              GAO-13-64 529 Plans
plans or Coverdells identified as white (non-Hispanic). 50 In contrast, about
69 percent of respondents in families without these accounts said they
were white (non-Hispanic). Moreover, only 5 percent of respondents in
families with 529 plans or Coverdells identified as Black/African-
American, compared to 14 percent without these accounts. While SCF
does not provide insight on why more white families use 529 plans than
others, a 2010 Sallie Mae study found that a larger percentage of white
parents saved for college in general when compared to African-American
and Hispanic parents. Further, the study found that white families save
more for college even when controlling for income.

To determine how the characteristics of families with 529 plans relate to
families who already have students in college, we reviewed
characteristics of college students’ families using data from the 2007-
2008 NPSAS. 51 While families with 529 plans are not directly comparable
to families of college students, 52 we developed profiles of these two
groups to understand the broad trends and found several differences.
When compared to families with students already in college, families with
529 plans or Coverdells still tended to have higher income and more
education (see table 1). 53 This tendency persisted even when examining
the median incomes of dependent and independent students separately.
Specifically, median parental income for dependent students was slightly
more than half the median income of families with 529 plans or
Coverdells, and independent students had slightly more than one-quarter
of the median income of those with 529 plans or Coverdells.



50
   The family may be multi-racial or mixed race, which is not captured in these data. For
example, the respondent’s spouse/partner may have a different race or ethnicity. We are
95 percent confident that the percentage of respondents whose families had 529 plans or
Coverdells who identified as white (non-Hispanic) was between 78.2 and 88.8 percent.
51
     These were the most recent NPSAS data available.
52
   While our estimates using SCF are for all families (including families with children in
college, with children not in college, and with no children), our estimates for families using
NPSAS are exclusively for families with a current college student. In NPSAS, families
include the student and the student’s parents (if the student is dependent) or the student’s
spouse (if the student is independent). Further, the population of NPSAS students’
families is not the same as the population of families with a child in college because a
family may have more than one student in college in a given year. Consequently students’
family characteristics derived from NPSAS are not directly comparable to family
characteristics based on the SCF.
53
     Data were not available on the financial assets held by families of college students.




Page 19                                                                  GAO-13-64 529 Plans
Table 1: Estimates of Selected Characteristics of College Students’ Families (from NPSAS) and Families with and without 529
Plans (from SCF)

                                                                                                      All Families (from SCF)
                                              College students’                            Families with                      Families without
Characteristic                           families (from NPSAS)                   529 plans or Coverdells               529 plans or Coverdells
                 a
Median income                                                 $47,747                                  $142,400                        $45,100
                                     b
Percent with at least a college degree                             42%                                     91%                              44%
                             c
Percent white (non-Hispanic)                                       62%                                     84%                              69%
                                         Source: GAO analysis of NPSAS 2007-2008 and SCF 2010 data.

                                         Notes: All amounts are in 2010 dollars. Unless otherwise noted, percentage estimates have 95
                                         percent confidence intervals within 5 percentage points of the estimate, and median income
                                         estimates have 95 percent confidence intervals within 5 percent of the estimate itself.
                                         a
                                           For college students’ families, this is the students’ parents’ income (for dependent students) or the
                                         students’ income including their spouses’ if married (for independent students). For “all families”, this
                                         is the total household income. We are 95 percent confident that the median income for families with
                                         529 plans or Coverdells was between $125,400 and $159,400.
                                         b
                                           For college students’ families, this is the percentage of students who had at least one parent with a
                                         college degree. For “all families”, this is the percentage of families in which the respondent or his/her
                                         spouse or partner had at least a college degree.
                                         c
                                           For college students’ families, this is the percentage of students with this race/ethnicity. For “all
                                         families”, this is the percentage of families for which the respondent had this race/ethnicity. We are 95
                                         percent confident that the percentage of respondents whose families had 529 plans or Coverdells
                                         who identified as white (non-Hispanic) was between 78.2 and 88.8 percent.




                                         Page 20                                                                            GAO-13-64 529 Plans
                          For additional information on 529 plan distributions, see text box below.

                           529 Plan Distributions

                           In 2010, more than 1 million taxpayers reported taking approximately $23.8 billion in
                           distributions from 529 plans, which they generally reported using for qualified
                           education expenses. Our review of IRS data found that about 5 percent of taxpayers
                           who took distributions from a 529 plan reported that a portion of their 529 plan
                           distributions were nonqualified and subject to a penalty. See table below for additional
                           data.

                                                                                   2007           2008           2009           2010
                            Number of taxpayers taking
                            distributions from 529 plans (in                        0.82           0.97           1.07           1.08
                            millions)
                            Total amount of distributions from
                                                                                    $8.5         $19.1           $20.5          $23.8
                            529 plans (in billions of 2010 dollars)
                            Percent of taxpayers for which some
                            portion of the 529 plan distribution
                            was reported as nonqualified and
                                                                                   7.8%           6.7%              6%          5.3%
                            subject to a penalty

                           Source: GAO analysis of IRS SOI 2007-2010 data.

                           Notes: We are 95 percent confident that the number of taxpayers who reported taking distributions from 529
                           plans was between 772,000 and 867,000 in 2007, between 916,000 and 1,019,000 in 2008, between
                           1,012,000 and 1,127,000 in 2009, and between 1,023,000 and 1,135,000 in 2010. We are 95 percent confident
                           that the total amount of 529 plan distributions (in 2010 dollars) was between $7.8 and $9.2 billion in 2007,
                           between $17.7 and $20.5 billion in 2008, between $18.9 and $22.2 billion in 2009, and between $21.2 and
                           $26.4 billion in 2010.




States’ 529 Plan
Features and Other
Factors Can Affect
Participation
Tax Benefits, Fees, and   Officials in every state and most experts and representatives we
Investment Options Vary   interviewed identified tax benefits, fees, and investment options as some
Across State 529 Plans    of the most important features consumers consider when choosing




                          Page 21                                                                              GAO-13-64 529 Plans
                     whether or not to participate in a 529 plan and, if so, which plan to
                     choose. These features vary by state and plan. 54 All states offer at least
                     one plan and many offer a combination of college savings (either direct-
                     sold, advisor-sold, or both) and prepaid plans. For example, 14 states
                     offer a direct-sold plan only, 22 states offer both direct-sold and advisor-
                     sold plans, and 6 states offer all three plan types: direct-sold, advisor-
                     sold, and prepaid. The popularity of direct-sold college savings plans has
                     grown over time and in 2011 total assets were essentially evenly split
                     between those and advisor-sold plans.

State Tax Benefits   States offer a range of tax benefits for 529 plans, and these benefits are a
                     primary incentive to investing in a 529 plan, according to many state
                     officials we interviewed. In addition to earnings growing tax-deferred, our
                     analysis of CSPN data shows the majority of states with an income tax
                     offer some form of benefits: 33 offer a tax deduction and 3 offer a
                     nonrefundable tax credit to residents who participate in their state’s
                     plan. 55 Five states also extend benefits to residents who participate in any
                     state’s plan. Almost all states limit tax benefits to the account owners, but
                     one state extends those benefits to grandparents, aunts, and uncles who
                     contribute to the plan. Officials in some states we interviewed said they
                     provide additional tax benefits, for example, one state offers an
                     exemption from the state inheritance tax. Others allow contribution
                     amounts that exceed the annual deduction limit to be carried over to the
                     following year’s return. 56

Fees                 Various fees and expenses may be associated with 529 plans, including
                     administrative and investment fees. Administrative fees, which are
                     charged by the state and/or the program manager hired by the state,



                     54
                       Throughout the report, the term states’ plans also includes the plan offered by the
                     District of Columbia.
                     55
                        As of July 2012, 5 states allow residents to deduct all 529 plan contributions in a given
                     tax year. Overall, 28 states provide a tax deduction on contributions, with a variety of
                     limits. Among these states, for example, 18 states allow deductions that range from $500
                     to $10,000 for a single filer and $1,000 to $20,000 for married couples filing jointly.
                     Additionally, 9 other states also allow deductions—ranging from $250 to $13,000—per
                     beneficiary.
                     56
                        We previously reported tax filers may have difficulty figuring out how to maximize
                     federal tax benefits given interactions with state tax codes. To maximize their combined
                     federal and state tax benefit, tax filers may also need to take into account the state
                     treatment of federal higher education tax expenditures. See GAO-12-560.




                     Page 22                                                                 GAO-13-64 529 Plans
cover administration of the 529 program, including customer service and
marketing. Investment fees are charged by the investment company to
manage the funds. The aggregate of these administrative and investment
fees is often referred to as “annual asset-based fees,” which are
expressed as a percentage of the fund’s average net assets. In addition,
advisor-sold plans may also charge a “sales load”—that is, a fee paid to
the selling broker when the fund is purchased or redeemed—and direct-
sold and advisor-sold plans may also charge participants additional fees
for services such as enrolling or changing the account owner.

Fees among 529 plans vary widely; total annual asset-based fees among
plans nationwide ranged from 0 percent to 1.97 percent for direct-sold
plans and 0 percent to 2.78 percent for advisor-sold plans, as of July
2012. As seen in table 2, there is variation among states in both
administrative and investment fees. Such variation occurred even among
states with similar administrative structures. For example, among three of
the states we reviewed where most administrative functions were
conducted in-house, one state charged administrative fees of between
0.44 percent and 0.46 percent of the balance annually, another charged
between 0.15 percent and 0.20 percent, and a third charged no
administrative fees, instead covering operational costs and salaries
through an annual state appropriation. 57 Investment fees also varied: for
example, underlying mutual fund fees ranged from 0 percent to 1.82
percent of the balance annually, depending on the type of investment
option a participant chooses. For advisor-sold funds, sales loads also
varied, ranging from 0 percent to 5.75 percent, 58 in part based on the fund
class. 59 In addition, among the five states we reviewed, four did not
charge an enrollment or application fee, while one charged $25, although
the fee may be waived through promotions to encourage participation.




57
   A state’s administrative fees may vary within a range based on the investment option
chosen by the participant.
58
   Initial sales charges are paid when the shares are purchased and deferred sales
charges are paid when the shares are redeemed.
59
   Some mutual funds offer investors different types of shares, known as classes. Each
class will invest in the same investment portfolio but will have different shareholder
services and/or distribution arrangements with different fees and expenses.




Page 23                                                              GAO-13-64 529 Plans
Table 2: Fee Ranges (Percent) for College Savings Plans, Direct-Sold and Advisor-Sold

                                                                                               Range for Direct-Sold    Range for Advisor-sold
Fee                        Description                                                            Plans (in percent)        Plans (in percent)
Administrative Fees
State Fee                  Fees charged by the state for operational costs.                                 0 to 0.75                 0 to 0.15
Program Manager Fee        Fee charged by program manager for administering                                  0 to 0.8                 0 to 1.15
                           the plan.
Investment Fees
Underlying Fund Expense    Expenses or fees charged by an investment firm for                               0 to 1.82                 0 to 1.82
                           managing the funds in the plans.
Distribution Fee           Fee charged in advisor-sold plans provided to                                          —                     0 to 1.0
                           brokers who sold the fund shares.
Miscellaneous Fees                                                                                          0 to 0.77                   0 to 0.5
                                          Source: GAO analysis of CSPN data as of July 2012.

                                          Note: In addition to the fees listed above, plans may also charge application, cancellation, change in
                                          beneficiary, change in investment options, or other fees.


                                          529 plan fees remain higher than fees for similar mutual funds an investor
                                          might purchase outside of a 529 plan. According to a 2011 study by
                                          Morningstar, 529 plan mutual funds charged, on average, an additional
                                          0.31 percent of the account balance annually in investment fees
                                          compared with their respective mutual fund categories in the open
                                          market. 60 The administrative fees charged by most 529 funds raise the
                                          cost even higher. However, Morningstar does note that fees for 529 plans
                                          have declined in recent years and officials at the majority of state plans
                                          we interviewed told us they have taken steps to reduce fees – for
                                          example, by renegotiating program manager contracts, using competitive
                                          bidding for program management, or consolidating functions in-house
                                          rather than using a program manager. As we have previously reported,
                                          fees are one of many factors participants should consider when investing
                                          because even a small fee increase can significantly decrease savings
                                          over time. 61




                                          60
                                            Morningstar, 2011 529 College Savings Plans Research Paper and Industry Survey
                                          (Chicago, IL: October 2011)
                                          61
                                            GAO, Private Pensions: Changes Needed to Provide 401(k) Plan Participants and the
                                          Department of Labor Better Information on Fees, GAO-07-21 (Washington, D.C.:
                                          November 16, 2006) and 401(k) Plans: Increased Educational Outreach and Broader
                                          Oversight May Help Reduce Plan Fees, GAO-12-325 (Washington, D.C.: April 24, 2012).




                                          Page 24                                                                           GAO-13-64 529 Plans
Investment Options   State plans offer a variety of investment options to 529 college savings
                     plan participants. 62 Plans in the states we reviewed, for example, include
                     up to 17 different investment options, including age-based, static, and
                     customized portfolios, to cater to participants’ various levels of risk
                     tolerance and investment sophistication. Age-based options were
                     generally the most popular and, according to state officials we
                     interviewed, may appeal to investors who might have more limited
                     investment experience or a lower risk tolerance. One state plan we
                     reviewed also offers a customized option for participants who seek more
                     control over their investments, which allows them to designate their own
                     allocations in funds such as stocks and bonds. For more risk-averse
                     participants, some states also offer a FDIC-insured investment option or
                     one that in some other way guarantees the investment’s principal. 63 To
                     help investors determine which plan best meets their needs, officials we
                     interviewed in two states said their states provide risk assessment
                     information through customer call centers. 64 One state developed a risk
                     tolerance questionnaire to explain investment scenarios, while the other
                     had a representative ask informal questions to help potential investors
                     assess their own risk level.

                     Families can also choose to invest in prepaid plans, which were offered in
                     three of the five states we reviewed. These plans also vary in fees,
                     payment options, and cost. Two plans, for example, charged an annual
                     administrative fee of just under 0.50 percent and the third charged no
                     annual fee. In terms of payment options and costs, two states we
                     interviewed offered prepaid plans by academic periods or units that can
                     be used to pay for future tuition costs with the option of paying in lump
                     sum or through a monthly payment program. According to state officials,
                     the cost of these prepaid plans is generally determined by forecasting
                     future tuition and fees at different types of schools (4-year, community
                     college, etc.), given a number of actuarial assumptions on tuition inflation
                     and anticipated investment return. One state, for example, offered a
                     contract to cover four years of college costs for a child currently under


                     62
                          In states we reviewed, assets in prepaid plans are invested by the state.
                     63
                        According to CSPN data, 45 states offer age-based investment options and 20 states
                     offer a guaranteed investment option.
                     64
                        While these assessments are designed to help investors decide which plan best meets
                     their risk tolerance and investment goals, state officials told us they do not provide
                     investment advice.




                     Page 25                                                                 GAO-13-64 529 Plans
                               age five at a lump sum of $56,600 and another state offered a similar
                               contract for just under $66,500. A third state we reviewed does not offer
                               units or contracts, but allows participants to contribute any amount to the
                               plan. When the participant withdraws the funds for qualified educational
                               expenses, they will receive the amount they contributed adjusted by a
                               tuition inflation value.


Participation is Affected by   Families encounter a number of barriers as they consider saving for
Ability to Save and Other      college: they may struggle with making saving a priority, and for those
Factors, but Some States       who do plan to save, many do not know 529 plans exist as a savings
                               option. Additionally, once families decide to invest in a 529 plan they may
Have Adopted Strategies to     have trouble understanding how it works and the variation across plans
Address Barriers               may affect their ability to select one that best meets their needs (see
                               fig. 5).

                               Figure 5: Factors that Affect 529 Plan Participation




Ability to Save                Families may encounter a variety of barriers saving for college, such as
                               insufficient income, underestimating the cost of college, and
                               misconceptions about financial aid availability, but selected states are
                               taking steps to help address these barriers. A 2010 national survey
                               published by Sallie Mae found that while nearly nine out of ten parents


                               Page 26                                                   GAO-13-64 529 Plans
expected their child would attend some form of higher education, only
three out of five parents of college-bound children have saved or invested
for their oldest child’s education. 65

First, many families may not save because they lack adequate income or
have competing financial priorities. The same Sallie Mae survey reported
that 68 percent of those who are not saving cited a lack of money as a
major reason. 66 State officials and some experts we interviewed also cited
this as a challenge: for example, one state official said that the economic
downturn has affected some families who are reluctant to make deposits
or participate in a 529 plan because they may need to choose between
paying their mortgage and saving for college. In terms of competing
priorities, two industry representatives we interviewed stressed that
retirement should be a higher priority than saving for college. Officials
from one state added when a family’s budget shrinks or the economy is
uncertain, families reduce college rather than retirement savings.
Furthermore, a few industry representatives said families should consider
using other tax-deferred savings vehicles where funds could be used for
multiple purposes, such as retirement and education. The states we
selected to review have adopted strategies to expand participation among
lower income families who may have limited resources to allocate
towards savings, including offering matching programs, low minimum
initial contributions, and less risky investment options.

      •    Matching Programs: While a limited number of states offer such
           options, matching programs to expand low-income families’
           participation and increase contributions by incentivizing saving
           have increased this group’s participation and college access,
           according to some state officials we interviewed. According to
           CSPN data, 14 states offer some form of matching program and
           two of the three states we reviewed specifically use matching
           programs to target low-income families. To qualify in one state, for
           example, a family must earn less than 200 percent of the federal
           poverty level 67 and deposit a minimum of $100 during the
           participating calendar year. The state then matches contributions,


65
     Sallie Mae, August 2010.
66
     Sallie Mae, August 2010.
67
   For example, in 2011 a family of 4 earning less than $44,700 would qualify, according
to plan documentation.




Page 27                                                              GAO-13-64 529 Plans
          dollar for dollar, up to $400 annually per beneficiary for up to 4
          years. In addition to increasing participation, officials from one
          state plan noted that the matching program can also help
          minimize student loans and reduce the amount students will have
          to work while in school. An ongoing experiment conducted by the
          Center for Social Development also found a positive impact on the
          number of 529 plan accounts for families who were automatically
          enrolled in a state-owned 529 account with a matching program in
          one state. 68 In addition to participating in the automatically opened
          account, families in the treatment group were offered an additional
          $100 to open a private account. These families opened private
          529 accounts at a higher rate (17 percent of families with a match
          compared to 2 percent of those in the control group without the
          incentives), and deposited more into those accounts. 69 While
          matching programs may have positive results, two states we
          reviewed reported challenges with funding and awareness. One
          state’s program had not been authorized since 2008 and officials
          in another state said their enrollment remained low despite being
          open to all participants because the state’s 529 marketing budget
          was eliminated.

     •    Low or No Minimum Initial Contributions: Low or no minimum
          initial contributions and fee waivers may also help increase
          participation among low-income families, according to state
          officials and others we interviewed. Nationally, minimum initial



68
   Center for Social Development, George Warren Brown School of Social Work,
Washington University in St. Louis, The SEED for Oklahoma Kids Experiment: Initial
Account Opening and Savings, (St. Louis, MO: 2010). The study was conducted in
partnership with the State of Oklahoma and RTI International. SEED for Oklahoma first
automatically enrolled treatment participants who received $1,000 in an Oklahoma 529
account. (Among the 1,361 treatment participants, one declined opening the state-owned
account.) These participants were also provided a time-limited incentive of $100 to open
their own private accounts, savings matches, and information on Oklahoma 529 accounts.
In contrast, control participants were offered no SEED for Oklahoma financial incentives or
information about Oklahoma 529, although they could open their own 529 plan accounts,
just as any non-study participant. Additional data on participants are expected to be
collected over the next few years.
69
   Rates only include additional private accounts opened by participants, i.e. accounts that
were separate from the state-owned accounts that were opened automatically for the
treatment group. The average deposit amount was $61 for treatment participants and $40
for the control group (not statistically significant). However for the subcategory of private
accounts owned by parents or guardians, treatment participants deposited an average of
$47 versus $13 for the control group (p<.05).




Page 28                                                                GAO-13-64 529 Plans
          contributions range from $10 to $5,000, according to our analysis
          of CSPN data; however, the majority of states require an initial
          contribution of $25 or less. Two states allow participants to open
          an account with any amount. Officials in one state reported that
          keeping the initial deposit amounts low can also help facilitate one
          of their main goals: to help spur the mental commitment and habit
          to save.

    •     Less Risky Investment Options: Officials from many states we
          reviewed said they offer investment options that pose less risk to
          the investor, which can appeal to low- to moderate-income
          families. One state, for example, partnered with two local banks to
          provide a FDIC-insured option to target families who might
          otherwise save in the bank’s savings account. According to an
          official from the plan’s banking partner, clients with more assets
          often use financial planners and are aware of 529 plans, while the
          FDIC-insured option was designed for those without financial
          planners and who use the bank’s more traditional products.

According to state officials, most of the states we reviewed are not
tracking participant’s demographic information such as income, however,
making the success of these efforts for low-income families difficult to
assess.

Second, in addition to insufficient income, some families may not save
because they procrastinate or underestimate the true cost of college,
according to officials from most of the states we reviewed. Some parents
may not budget money to save for college due to a lack of understanding
about what college really costs or they become overwhelmed and do
nothing, officials at one state 529 plan said. To address these challenges,
selected state 529 plans have adopted financial literacy programs and
marketing strategies emphasizing the importance of saving even a small




Page 29                                                      GAO-13-64 529 Plans
amount early and often. 70 To target families with younger children, two
states provide materials to parents of newborns through the hospital or
direct mail and two states work with elementary schools to distribute
materials on the states’ 529 plans. Some states also establish
contribution deadlines linked to certain benefits, such as discounted
enrollment, or provide incentives to families who contribute during certain
times of the year. To prevent families from feeling overwhelmed about
college costs, one state has focused its marketing on saving a small
amount each month, $25, to help reduce the student’s future debt,
instead of focusing on the total cost of college.

Third, parents may not save for college because they have
misconceptions about financial aid availability, according to state officials
and some higher education experts. Some noted that families may not
understand that most students receive aid in the form of loans that will
need to be repaid, rather than receiving grants or scholarships. According
to a 2010 national study, 84 percent of non-saving parents expect their
child to qualify for enough scholarships or financial aid to cover the costs
of college with 49 percent citing it as a major reason for not saving. 71
However, according to our analysis of NPSAS data for all postsecondary
students in the 2007-2008 school year, only about half received grants
with a median amount of $3,400 (in 2010 dollars). About 40 percent of
students took out loans, with a median amount of about $6,800 (in 2010
dollars). Financial aid including grants and loans only covered 37 percent
of a student’s cost of attendance, with the median out-of-pocket expenses
totaling about $7,000 per student (in 2010 dollars). Further, while many
families hope to fund college through financial aid, one recent study found
that 2011 levels of scholarships were unsustainable as colleges felt the



70
    The Department of Education has emphasized the importance of financial literacy
related to college savings. For example, the GEAR UP program, where grantees design
projects that promote participating students’ secondary school completion and enrollment
in postsecondary education, also includes promotion of financial literacy and economic
literacy education or counseling. In 2012, Education announced a plan to introduce in
fiscal year 2013 a new demonstration project, which includes an evaluation component, to
determine the effectiveness of pairing federally-supported college savings accounts with
GEAR UP activities as part of an overall college access and success strategy. Education
has also recently sponsored research assessing interventions that provide families with
information on 529 college savings plans and incentives for them to invest in such
accounts. The study will gather data on the effects of these interventions on college
savings behavior and college outcomes.
71
     Sallie Mae, August 2010.




Page 30                                                             GAO-13-64 529 Plans
                               impact of a difficult economic climate, constraints on endowments, and
                               tighter budgets. 72 In response, many of the states we reviewed have
                               attempted to address misconceptions about the financial aid process. For
                               example, one state lists common myths about 529 plans on its website,
                               explaining that approximately 60 percent of federal financial aid comes in
                               the form of loans, a debt the family must repay. The site encourages
                               families to save even in small amounts to offset the amount of debt the
                               family will incur.

Awareness of 529 Plans as a    For those who are saving for college, awareness that 529 plans exist as a
Savings Option                 savings option is a challenge to participation, according to officials in most
                               of the states we reviewed. In addition, among parents who are saving for
                               college, one study found that almost half are unfamiliar with 529 plans. An
                               additional 4 percent volunteered that they had never heard of the plan or
                               did not know what it was. 73 Families also learn about 529 plans through
                               financial planners, according to many state officials we interviewed;
                               therefore, awareness may be a particular challenge for low-income
                               families who generally do not have access to such resources. Further,
                               some state officials and industry representatives we interviewed
                               encountered families with misperceptions about how 529 plans work,
                               such as not understanding they can invest in plans outside their home
                               state or use savings at any college or university. For example, officials
                               from two states reported families mistakenly believe prepaid plans can
                               only be used at an in-state institution. 74

State Variation, Tax           While the high number of plans and variation in investment options and
Implications, and a Limit on   cost can offer consumers choice, families who ultimately decide to save
Investment Option Changes      with a 529 plan can find it difficult to compare plans, according to many
                               state officials and experts. For example, the wide range of fee types can
                               be difficult to understand and compare across plans because they are not
                               consistent and it is difficult to compare asset-based fees based on
                               percentages with flat fees such as an annual fee in dollar amounts,
                               according to one financial expert. Plan complexity can also make


                               72
                                    Sallie Mae, How America Pays for College 2012 (Newark, DE: 2012).
                               73
                                    Sallie Mae, August 2010.
                               74
                                  If a beneficiary of a prepaid tuition plan elects to attend an out-of-state college, the state
                               529 plan will typically pay the student’s chosen institution the tuition and fees it would
                               have paid at an in-state public college, which may be less than the tuition at the chosen
                               institution.




                               Page 31                                                                   GAO-13-64 529 Plans
marketing and communication difficult, according to officials we
interviewed in two states. Marketing officials from one state told us
consumers requested more information on 529 plans, but it was difficult to
communicate information about the complex plans in a simple, consumer-
friendly way. Officials in another state noted that plan complexity and a
lack of clear information can discourage families from researching and
enrolling in a plan.

Many state officials and some academic experts and industry
representatives reported that simplifying the information available to
consumers might keep families from feeling overwhelmed. Because
MSRB rules do not apply to state issuers when they market their direct-
sold 529 plans, CSPN developed a set of disclosure principles to help
states provide consistent information. The voluntary principles contain
recommendations to help consumers understand plans and compare
various features, such as fees, tax issues, and risk. While disclosures
have been helpful, according to one expert who consults with a number of
states, there is room for improvement: disclosures could be more rigorous
in ensuring that consumers are informed of less-costly options within a
state if they exist and should cover information on prepaid plans, which is
currently not standardized. When comparing direct-sold disclosure
documents across states we reviewed, we found that the five states
generally adhered to the CSPN disclosure principles and contained
consistent information a consumer could compare. Three states,
however, were missing some information that could be helpful to
consumers, such as information on the risk of state tax law changes and
a statement that 529 plans should only be used to save for qualified
higher education expenses.

The structure of federal and state tax benefits, a primary incentive for
some 529 plan investors, can also affect participation as they may not be
as helpful to low-income families, according to some academic experts,
industry representatives, and state officials we interviewed. 75 Low-income
families with low or no tax liability see less benefit from federal tax
benefits and may see no benefit from nonrefundable state tax credits
provided to 529 plan investors. According to a 2009 Treasury report,
families saving in 529 plans may need to carefully consider whether their



75
  Prior GAO work has also found education savings accounts, such as 529 plans, are
more advantageous to families with higher incomes and tax liabilities. See GAO-12-560.




Page 32                                                             GAO-13-64 529 Plans
child will go to college because the penalty incurred if the funds are not
used for qualified education expenses may outweigh the tax benefits for
low-income families. 76 In addition, Treasury noted most states do not
extend tax benefits to residents investing in out-of-state plans, limiting
competition. As a result, families have a strong incentive to choose their
home state plan even if other plans offer preferable investment choices.
In 2009, Treasury recommended states eliminate this “home-state bias”
to provide more investment options to consumers, more intense
competition between plans, and potentially lower fees. 77 According to an
annual report from one state that extends its tax benefits to residents who
invest in other states’ plans, doing so, when other states do not, puts the
home state plan at a competitive disadvantage. State officials explained
that this policy results in other plans marketing their products in the state.
Residents, therefore, may be unaware of their home state plan’s benefits,
according to the report.

Finally, the fact that account holders may change their investment option
only one time per year may affect participation in 529 plans, according to
state officials and some industry representatives we interviewed. Officials
from one financial services company advocated removing any limits on
changing investment choices beyond those imposed by the financial
services company sponsoring the fund, as is the case with 401(k) plans
and individual retirement accounts. Another industry representative
observed some 529 plan participants changing their account beneficiary
solely because it would allow them to change their investment options.
However, the representative cautioned that participants should not
change their investment options too frequently; many experts advocate
that investors are best served by sticking with a long-term investment
plan.




76
     Treasury, 2009.
77
   Treasury, 2009. In addition, Treasury also recommended increasing the provision of
age-based indexed funds; making contribution limits more effective by making them per-
beneficiary limits rather than per-beneficiary per-state limits; improving industry reporting
of plans’ historical returns, plan participation by income, and how plans are invested at the
account level; and improving government monitoring of 529 plan accounts and their
disbursements.




Page 33                                                                GAO-13-64 529 Plans
Savings in 529 Plans
Affect Financial Aid
the Same as Other
Assets
Savings in 529 Plans Are     The extent to which savings in 529 plans, or other investments, affect
Treated Similarly to Other   how much a family is expected to contribute to the cost of college—the
Assets That Are Included     federal expected family contribution (EFC)—generally depends on the
                             family’s amount of assets. Education incorporates the amount of specific
When Calculating the         types of assets into various calculations to determine the EFC. 78
Expected Family              However, in two calculations, families who meet certain criteria are either
Contribution                 not expected to contribute to the cost of college (automatic zero EFC) or
                             they qualify for a simplified calculation. 79 In both cases, assets, including
                             savings in 529 plans, are not included in the calculation of the EFC.
                             According to the 2007-2008 NPSAS, about a quarter of families who filed
                             FAFSAs met these criteria.

                             In other calculations, assets, including savings in 529 plans, may affect
                             the EFC to different extents depending on whether students are
                             dependent on their parents or are independent with dependents of their
                             own. For dependent students, between 2.64 percent and 5.64 percent of
                             parental assets may be included in the EFC as described below:

                                    •   First, the parents report the net worth (current value minus debt)
                                        of their investments (see fig. 6 #1), 80 but before the total
                                        contribution from assets is calculated, an amount known as the
                                        “education savings and asset protection allowance” is subtracted




                             78
                                Assets that are not required to be reported on the FAFSA include principal place of
                             residence, a family farm, family-owned small businesses, retirement plans, and whole life
                             insurance.
                             79
                                Students can qualify for an automatic zero EFC or a simplified EFC based on their
                             parents’ income (dependent students) or their income (independent students) and any of
                             the following: (1) receipt of federal benefits, such as Social Security Supplemental
                             Security Income or food stamps, (2) no requirement to file an income tax return or may file
                             an IRS 1040A or 1040EZ, or (3) a parent (dependent student) or student/spouse
                             (independent student) is a dislocated worker.
                             80
                                  Prepaid plans are worth the refund value of the tuition credits or certificates.




                             Page 34                                                                    GAO-13-64 529 Plans
          (see fig. 6, #2). This allowance is designed to help protect a
          portion of the parents’ assets. 81

     •    Second, 12 percent of any parental asset amount that exceeds
          the education savings and asset protection allowance is used to
          determine the contribution from assets that will be considered in
          the final EFC calculation (see fig. 6 #3).

     •    Third, this contribution from assets is added to the parents’
          available income to determine their adjusted available income
          (see fig. 6, #4).

     •    Fourth, a marginal rate, from 22 percent up to a maximum of 47
          percent, is applied to the sum of the parents’ available income and
          contributions from assets (known collectively as the adjusted
          available income) to determine their EFC (see fig. 6, #5). As a
          result, the amount of net parental assets, including savings in 529
          plans, that can be included in the EFC ranges from 2.64 percent
          to 5.64 percent. 82




81
   The education savings and asset protection allowance increases with the age of the
older parent. For example, in the 2012-2013 school year, the allowance for two parents,
the older of which was 45, was $41,300 whereas the allowance for two parents, the older
of which was 55, was $53,400. According to Education’s Federal Student Aid Handbook,
the allowances approximate the present cost of an annuity, which, when combined with
Social Security benefits, would provide at age 65 a moderate level of living for a retired
couple or single person.
82
  The 2.64 percent is the result of assessing 22 percent of the 12 percent of assets that
are included in the EFC (.22 X .12 = .0264). Similarly, 5.64 percent results from assessing
47 percent of 12 percent (.47 X .12 = .0564).




Page 35                                                               GAO-13-64 529 Plans
Figure 6: Expected Family Contribution from Parents’ Assets for Dependent
Student




Even if the dependent student is the 529 plan account owner, the savings
are still assessed at the parents’ asset rate. The EFC includes 20 percent
of the value of a dependent student’s assets; however, savings in a 529
plan where the student is the account owner are still considered assets of
the dependent student’s parent(s).




Page 36                                                       GAO-13-64 529 Plans
Independent students can have up to 20 percent of their 529 plans
savings and other assets included in their EFC. However, assets of
independent students with dependents (other than a spouse) may be
assessed at a lower rate. After an asset protection allowance is
subtracted from their net assets, any remainder is multiplied by 7 percent.
Then, a marginal rate, from 22 percent to 47 percent, is applied to the
sum of their available income and contribution from assets—similar to the
process used for parental assets of dependents students. Therefore, from
1.54 percent to 3.29 percent of assets may be included in their EFC. In
contrast, independent students who do not have dependents (other than
a spouse) will have 20 percent of any assets exceeding the asset
protection allowance included in their EFC. Education officials said
independent students without children to support are generally expected
to contribute a higher percentage of their assets because their primary
focus should be on paying for their education.

Distributions from 529 plans owned by parents and/or the student will not
be considered as income in the EFC calculation in future years if they are
used for qualified education expenses. However, if a student receives 529
plan distributions from an account owned by someone other than himself
or the custodial parent, those funds count as student income and could
affect the EFC in subsequent years. 83 For example, if a student received
funds from a 529 plan owned by a grandparent, he would have to report
those funds as untaxed student income on the next year’s FAFSA,
according to Education officials (see fig. 7).




83
  Since the EFC is based on the previous year’s income, distributions from a 529 plan not
owned by the parent or student would not affect the EFC for the student’s last year in
college if the student received the funds after his final FAFSA had been filed.




Page 37                                                             GAO-13-64 529 Plans
Figure 7: FAFSA Questions on Student Untaxed Income




                                      A small percentage of families who applied for federal financial aid in
                                      2007-2008 had enough assets to be included in the determination of their
                                      EFC. In our analysis of families who filled out the FAFSA, we found that
                                      13 percent of all students—24 percent of dependent students and 4
                                      percent of independent students—had enough assets to be included in
                                      their EFC. 84 In other words, the net worth of their (and possibly their
                                      parents’ or spouses’) assets exceeded the savings and asset protection
                                      allowance and was included in the EFC at some percentage. Education
                                      officials said that because the asset protection allowance is high, federal
                                      student aid decisions do not heavily rely on assets, such as savings in
                                      529 plans. Officials told us that while home equity was removed from the
                                      list of assets used to calculate the EFC in 1992, the asset protection
                                      allowance remained the same. Since then, they said, assets have been a
                                      less relevant factor in calculating the EFC.




                                      84
                                        In 2007-2008, 61 percent of dependent and 52 percent of independent students filled
                                      out the FAFSA.




                                      Page 38                                                            GAO-13-64 529 Plans
Many States and Selected
Institutions Also Treat 529
Plan Savings As Assets
States                        Most state financial aid offices also consider savings in 529 plans as
                              assets. 85 According to the 2009-2010 National Association of State
                              Student Grant and Aid Programs survey, 86 35 states reported that they
                              used the federal methodology for determining the EFC for state aid. 87
                              However, some states that reported using federal methodology for their
                              primary student needs analysis also indicated they provide special
                              treatment for state 529 college savings or prepaid plans when
                              determining student eligibility for aid. Specifically, seven states that used
                              federal methodology to award their state aid excluded the state’s 529
                              college savings plan and three excluded the state’s prepaid plan from
                              their calculation for state aid.

                              Of the officials in the six state financial aid offices we interviewed, none
                              said they considered assets to a greater extent than the FAFSA and a
                              few said their state took specific steps to exempt savings in these plans
                              from consideration. Specifically, officials in two states said there is
                              language in their 529 plan authorizing legislation that exempts plan
                              savings when determining a student’s eligibility for state financial aid.
                              Officials in another state said their state issued a regulation stating that
                              savings in a 529 plan would not affect state grant eligibility for residents
                              attending nonprofit higher education institutions. An official in a fourth
                              state said the legislature changed its higher education authorization
                              language so that students would still be eligible to receive a state
                              scholarship even if they enrolled in the state’s prepaid plan.

Institutions                  Institutional financial aid practices vary with regard to assets, but those
                              with more aid to award may gather additional information about a family’s
                              financial status, according to some representatives of national financial




                              85
                                 According to the 2007-2008 NPSAS, 15 percent of all students received state financial
                              aid.
                              86
                                This survey is a central repository for information on state support of students and
                              families paying for postsecondary education.
                              87
                                The District of Columbia and Puerto Rico also reported that they use federal
                              methodology.




                              Page 39                                                                GAO-13-64 529 Plans
aid organizations and institutional officials we interviewed. 88 Some
schools require students to provide information in addition to the FAFSA,
such as filling out the College Board’s PROFILE form or submitting tax
returns. One official said the PROFILE provides more detailed information
on a family’s assets, such as home equity and retirement account
balances, which helps the university prioritize the students with the most
need.

Institutional officials we interviewed said their schools considered savings
in 529 plans as assets, even if they used different methodologies to
calculate their financial aid or included the assets at different
percentages. Officials at two institutions said they did not consider
savings in 529 plans beyond how they are already reported by the family
on the FAFSA. An official at a third institution said the school does not
collect any additional information on savings in 529 plans beyond what is
requested on the FAFSA even though the school requires families to fill
out the PROFILE form and uses an institutional methodology to award its
financial aid. The remaining institutional officials said they collect
additional family financial information when calculating student aid, but
consider savings in 529 plans similarly to the family’s other assets.
Specifically, one institutional official said her school uses the PROFILE
form to gather more detailed information about a family’s financial
situation. Even so, 529 plan savings do not affect a student’s need any
differently than other assets, she said, which are assessed by the
institution at about five percent of their value. Additionally, she said 529
plan assets are considered parental assets even if they are reported as
student assets because the school assesses parental assets at a lower
percentage. An official at another institution said her school assesses
assets at around 20 percent of their value when calculating the EFC for
institutional aid.

Officials’ opinions varied on whether savings in 529 plans should affect
financial aid, but many said families’ concerns that these savings will
have an adverse effect are common. One state financial aid official said it
would be helpful if 529 plan savings were excluded entirely from the
calculation because including them can be a deterrent to saving. She said
her office often encounters families who feel penalized for saving



88
   According to the 2007-2008 NPSAS, 22 percent of all students received institutional
financial aid.




Page 40                                                              GAO-13-64 529 Plans
               because they believe the students without savings receive financial aid.
               Likewise, a 529 plan official said regardless of whether the student’s
               financial aid will be reduced by savings in a 529 plan, there is the
               perception that it will. In contrast, one institutional financial aid official said
               savings in 529 plans should not be treated any differently than other
               assets because the need analysis is meant to determine the family’s fair
               share of college expenses and excluding 529 plans would be counter to
               this aim. One researcher we interviewed found that the issue may be
               most important for those families who are on the margin of receiving
               federal financial aid. Regardless of the perceived effect 529 plan savings
               may have on financial aid, some of the officials we interviewed said they
               encourage families to save for college because much of the aid they may
               be offered could be in the form of loans, so saving will generally be in the
               student’s long-term financial interest.


               As currently designed, 529 college savings plans benefit a small
Concluding     percentage of U.S. families. In general these families tend to be wealthier
Observations   than others. It is not clear whether the $1.6 billion in federal tax
               expenditures that these plans represent strategically targets limited
               federal resources. Although 529 plans do help some families save for
               college, families with less income and who are uncertain about whether
               their children will attend college may have less incentive to invest
               resources in 529 plans than in other forms of savings. In addition, the tax
               benefits attractive to a higher-income family do not offer as much benefit
               to a family with lower tax liability.

               Questions about who benefits from this tax expenditure occur in an
               environment of long-term fiscal challenges and difficult choices about how
               the federal government allocates limited resources. Reviewing 529 plans
               in conjunction with the other billions of dollars in federal educational
               assistance provided through tax expenditures, credits, and deductions
               could help Congress determine whether this program is meeting its goals.
               Similar to GAO’s prior work on higher-education related tax expenditures,
               our analysis of 529 college savings plans was not able to address all
               questions that could inform future policy choices regarding 529 plans. For
               example, what is the purpose of the federal tax benefits provided through
               529 plans? Are the goals and objectives clearly defined and measurable?
               Who is the target population for 529 plans and does the current structure
               provide appropriate incentives for that population? How do the 529 plan
               federal tax benefits interact with other programs, such as federal financial
               aid and other higher education tax benefits and savings vehicles?



               Page 41                                                         GAO-13-64 529 Plans
                  Consideration of these questions could facilitate continued congressional
                  oversight of this tax expenditure.


                  We provided a draft of this report to Education, Treasury, and IRS for
Agency Comments   comment. The agencies provided technical comments that were
                  incorporated, as appropriate.


                  We are sending copies of this report to the Secretary of Education,
                  Secretary of the Treasury, Commissioner of Internal Revenue, relevant
                  congressional committees, and other interested parties. In addition, the
                  report will be available at no charge on the GAO Web site at
                  http://www.gao.gov. If you or your staff have any questions about this
                  report, please contact me at sagerm@gao.gov or 202-512-6806. Contact
                  points for our Offices of Congressional Relations and Public Affairs may
                  be found on the last page of this report. GAO staff who made key
                  contributions to this report are listed in appendix III.

                  Sincerely yours,




                  Michelle Sager, Acting Director
                  Education, Workforce, and Income Security Issues




                  Page 42                                                  GAO-13-64 529 Plans
                         Appendix I: Objectives, Scope, and

Appendix I: Objectives, Scope, and
                         Methodology



Methodology

                         Our review examined: (1) the percentage and characteristics of families
                         enrolling in 529 plans, (2) the plan features and other factors that affect
                         participation in 529 plans, and (3) the extent to which savings in 529
                         plans affect financial aid awards. To answer these research objectives,
                         we analyzed government data; interviewed state 529 plan officials from
                         select states as well as industry representatives and academic experts;
                         reviewed plan documents and analyzed industry data; conducted a
                         literature review; interviewed federal, state, and institutional financial aid
                         officials; and reviewed Department of Education (Education) and Internal
                         Revenue Service (IRS) documents as well as relevant federal laws,
                         regulations and guidance.

                         We assessed the reliability of the data we used by reviewing
                         documentation, interviewing knowledgeable officials, and conducting
                         electronic testing on relevant data fields. We found the data we reviewed
                         reliable for the purposes of our analyses. We conducted this performance
                         audit from November 2011 to December 2012 in accordance with
                         generally accepted government auditing standards. Those standards
                         require that we plan and perform the audit to obtain sufficient, appropriate
                         evidence to provide a reasonable basis for our findings and conclusions
                         based on our audit objectives. We believe that the evidence obtained
                         provides a reasonable basis for our findings and conclusions based on
                         our audit objectives.


Analysis of Government   To determine the percentage and characteristics of families enrolling in
Data                     529 plans, we reviewed data from the 2010 Survey of Consumer
                         Finances (SCF); the 2007-2008 National Postsecondary Student Aid
                         Study (NPSAS); and 2007-2010 Statistics of Income (SOI) federal tax
                         data. The 2010 SCF, 2007-2008 NPSAS, and 2010 SOI were the most
                         recent data available at the time of our engagement, so to ensure
                         consistency in reporting we adjusted all dollar amounts from previous
                         years’ data to 2010 dollars.

                         Each of these three data sources (SCF, NPSAS, and SOI) are based on
                         probability samples and estimates are formed using the appropriate
                         estimation weights provided with each survey’s data. Because each of
                         these samples follows a probability procedure based on random
                         selections, they represent only one of a large number of samples that
                         could have been drawn. Since each sample could have provided different
                         estimates, we express our confidence in the precision of our particular
                         sample’s results as a 95 percent confidence interval (e.g., plus or minus
                         2.5 percentage points). This is the interval that would contain the actual


                         Page 43                                                      GAO-13-64 529 Plans
Appendix I: Objectives, Scope, and
Methodology




population value for 95 percent of the samples we could have drawn.
Unless otherwise noted, all percentage estimates based on the SCF,
NPSAS, and SOI have 95 percent confidence intervals that are within 5
percentage points of the estimate itself, and all numerical estimates other
than percentages have 95 percent confidence intervals that are within 5
percent of the estimate itself.

For our analysis of the percentage and characteristics of families who
held 529 plans, we relied primarily on restricted data from the 2010 SCF.
SCF is a triennial survey sponsored by the Board of Governors of the
Federal Reserve System (Federal Reserve) to provide detailed
information on the finances of U.S. households. The SCF sample of 6,492
households represented approximately 118 million households in 2010. It
collects detailed financial characteristics on an economically dominant
single individual or couple (married or living as partners) in a household,
which we refer to as a family for the purposes of this report. 1 For our
analysis, we aggregated financial information so that, unless otherwise
noted, all SCF estimates are for the family rather than the individual
survey respondent. We did not restrict our analysis to families with
children, in part, because 529 plans can be used for nearly anyone,
including one’s child, grandchild, niece, nephew, and oneself. 2 However,
about 88 percent of families with 529 plans or Coverdell Education
Savings Accounts (Coverdells), 3 a similar education savings vehicle, had



1
   The unit of analysis for the SCF includes this economically dominant individual (or
couple) along with economically interdependent individuals (such as minor children) also
living in the household.
2
  Additionally, because of the limited number of families in the SCF sample that had 529
plans or Coverdell Education Savings Accounts, we were unable to produce reliable
estimates for subgroups of families with these accounts, such as characteristics by age
group or by whether families had children living with them. We were, however, able to
generate reliable estimates for all families with 529 plans or Coverdell Education Savings
Accounts.
3
  Similar to 529 plans, Coverdell accounts allow families to save for education expenses.
Account earnings accumulate tax-deferred and earnings included in withdrawals used to
pay for qualified education expenses are not subject to federal tax. Unlike 529 plans, (1)
Coverdell contributors must generally have a modified adjusted gross income of less than
$110,000 per year ($220,000 in the case of a joint return), (2) Coverdells have annual
contribution limits of $2,000 that must generally stop when a beneficiary reaches 18 years
of age, and (3) Coverdells can be used for qualified elementary, secondary, or
postsecondary expenses typically for individuals under age 30. These Coverdell features
will be affected if the changes in the Economic Growth and Tax Relief Reconciliation Act
of 2001 are not extended.




Page 44                                                               GAO-13-64 529 Plans
Appendix I: Objectives, Scope, and
Methodology




children 25 years of age or younger living with them. Our estimates for
529 plans included Coverdells because Federal Reserve officials said
respondents did not always distinguish between the two account types;
therefore, we did not separate these responses because of data reliability
concerns. However, the officials indicated that a larger share of the SCF
respondents reported having 529 plans than Coverdells. Further, using
SOI data, we estimate that in 2010 approximately 85 percent of tax filers
who took a distribution from either a 529 plan or a Coverdell reported
distributions from a 529 plan while 14 percent reported distributions from
a Coverdell and 1 percent reported distributions from both. We wrote an
analysis program that the Federal Reserve ran using their restricted SCF
dataset to separate information on Medical Savings Accounts and Health
Savings Accounts, which had been included in the 2010 public dataset
with 529 plans and Coverdells. Federal Reserve officials modified some
resulting information to protect the privacy of survey respondents, for
example by rounding dollar amounts.

Using SCF, we generated estimates on the percentage and
characteristics of families enrolled in 529 plans or Coverdells and of
families not enrolled in these plans. We examined family characteristics
such as wealth (financial assets), income, education, and race or
ethnicity. To calculate financial assets, we used the methodology the
Federal Reserve uses to produce variables for its published Bulletin
articles. This methodology included assets held in checking, savings, and
brokerage accounts, certificates of deposit, mutual funds, stocks, bonds,
life insurance, retirement accounts, and other vehicles such as 529 plans.
Assets held in retirement accounts included those in defined contribution
plans (e.g. a 401(k), individual retirement account, or thrift savings plan)
as well as in traditional pensions or defined benefit plans. To calculate
income, we used the family’s self-reported total income. To report the
family’s highest educational attainment, we reviewed the education of
each respondent and his or her partner or spouse and included whichever
was higher. We reported information on the respondent’s race or
ethnicity, which does not necessarily indicate the race or ethnicity of other
family members. 4

We used 2007-2008 NPSAS data to develop a similar demographic
profile for college students and generate other estimates on college costs



4
    Further, the respondent is not necessarily the head of the household.




Page 45                                                                 GAO-13-64 529 Plans
Appendix I: Objectives, Scope, and
Methodology




and financial aid amounts. NPSAS is a comprehensive study by
Education that examines how students and their families pay for higher
education. It includes nationally representative samples of 113,535
undergraduates, 12,585 graduate students, and 1,581 first-professional
students 5 enrolled any time between July 1, 2007 and June 30, 2008. The
NPSAS data are based on administrative records and student interviews,
and NPSAS includes survey results from both students who received
financial aid and those who did not. While we used NPSAS to develop a
demographic profile for college students similar to the one we developed
for the general population using SCF, families with 529 plans are not
directly comparable to families of college students. For example, while
our estimates using SCF are for all families (including families with
children in college, with children not in college, and with no children), our
estimates for families using NPSAS are exclusively for families with a
current college student. In NPSAS, families include the student and the
student’s parents (if the student is dependent) or the student’s spouse
and dependents (if the student is independent). Further, the population of
NPSAS students’ families is not the same as the population of families
with a child in college because a family may have more than one student
in college in a given year. Consequently students’ family characteristics
derived from NPSAS are not directly comparable to family characteristics
based on the SCF, though for the purposes of our report we use similar
terminology to describe them. Similar to our analysis of SCF, we
generated estimates of the characteristics of college students’ families—
including income, 6 education, and race or ethnicity. To report income, we
calculated the total income of (1) the student’s parents (if the student was
dependent) and (2) the student and the student’s spouse (if the student
was independent). To report the family’s highest educational attainment,
we reviewed the education of each student’s mother and father and
included whichever was higher. We also reported information on the
student’s race or ethnicity, which does not necessarily indicate the race or
ethnicity of other family members. We also developed separate estimates
for students who are considered either dependent on their parents or
independent for financial aid purposes.




5
  First-professional students are students pursuing degrees in fields such as pharmacy,
dentistry, medicine, or law.
6
    Information was not available on the assets for families of college students.




Page 46                                                                  GAO-13-64 529 Plans
Appendix I: Objectives, Scope, and
Methodology




We also used NPSAS to generate other estimates related to the cost of
college and amount of financial aid awards. First, we estimated the
median annual cost of attendance at 4-year public and private non-profit
institutions. This included tuition and fees, room and board,
transportation, and personal expenses, though the estimate is valid only
for students who attended one institution. Second, we estimated the
percentage of students who received grants and loans, as well as the
median amount of these grants and loans and the percent and amount of
college expenses remaining. Third, we generated estimates for the
proportion of students who filled out the Free Application for Federal
Student Aid (FAFSA) and, for those who did fill out the FAFSA, the
proportion who met certain criteria to have assets excluded from the
federal expected family contribution (EFC) and the proportion whose
assets affected the EFC. Finally, we calculated the percentage of
students who received state and institutional financial aid.

We also analyzed 2007-2010 taxpayer data from SOI to determine the
extent to which taxpayers used distributions from 529 plans for qualified
education expenses and how the tax savings from these plans were
distributed across income levels. The SOI individual tax return file is a
stratified probability sample of income returns filed with the IRS. The SOI
sample of 308,583 returns represented approximately 143 million tax
returns filed for 2010. We combined data from the SOI individual tax file
with information from the Form 1099-Q. A 529 plan must file a Form
1099-Q with the IRS and the account owner or beneficiary each time a
taxpayer receives a distribution from a 529 plan account. 7 This form
includes information on the amount of the distribution and the earnings (or
loss) on the distribution. When taxpayers receive a Form 1099-Q, they
must determine if the distribution was used for qualified education
expenses. If the distribution, or any portion of it, was nonqualified, the
earnings portion is subject to taxes and, in some cases, a penalty. The
taxpayer determines the amount of taxes and penalty owed on the
nonqualified distribution by completing Form 5329, which is contained in
the individual tax return file. By combining information from the 1099-Q
with information in the individual tax return file, we identified the
percentage of taxpayers who reported nonqualified distributions that were



7
  Distributions from a 529 plan include those used for qualified education expenses as
well as those used for nonqualified expenses or refunds to the account owner or
beneficiary.




Page 47                                                              GAO-13-64 529 Plans
                            Appendix I: Objectives, Scope, and
                            Methodology




                            subject to a penalty. 8 We also used SOI data to estimate the tax savings
                            by using the National Bureau of Economic Research’s (NBER) TAXSIM
                            Model, a microsimulation model of U.S. federal and state income tax
                            systems. 9 TAXSIM calculates estimated liabilities under U.S. federal and
                            state income tax laws from actual tax returns that have been prepared for
                            public use by the Statistics of Income Division of the IRS. 10 Our analysis
                            of the tax savings from 529 plans excludes returns with a filing status of
                            married filing separately.


Interviews with State 529   To provide information on the factors that affect participation we
Plan Representatives,       interviewed officials from the following five state 529 plans and their
Academic Experts, and       industry partners: Louisiana, Michigan, Pennsylvania, Utah, and Virginia.
                            We used College Savings Plan Network (CSPN) data to select states that
Industry Representatives    represented a variety of plan types (direct-sold, advisor-sold, and pre-
                            paid), offered a number of features (i.e., various state tax benefits, state
                            matching program), and were geographically diverse. We also used
                            suggestions provided by academic experts and industry representatives
                            to inform our selection as well as to provide information on 529 plan
                            participation. We interviewed academic researchers (including the Center
                            for Social Development), industry regulators (the Financial Industry
                            Regulatory Authority and the Municipal Securities Rulemaking Board),
                            financial services companies (American Funds and UPromise), financial
                            experts (such as Financial Research Corporation and Morningstar),
                            College Savings Plan Network, Savingforcollege.com, and consumer
                            interest groups (Investment Company Institute and the American
                            Association of Individual Investors).


Analysis of Plan and        We analyzed CSPN data on state 529 plans to provide a national
Industry Data and           overview of plan features, such as fees and state tax benefits. Biennially,
Documentation               states submit plan data to CSPN through an online system to be posted



                            8
                              While earnings on all distributions are subject to a tax if the distribution was not used for
                            qualified education expenses, the penalty is waived under certain circumstances, such as
                            when a beneficiary dies or receives a scholarship.
                            9
                             NBER provided GAO with a copy of TAXSIM that we executed within our secure tax
                            computing environment.
                            10
                              See Daniel Feenberg and Elisabeth Coutts, “An Introduction to the TAXSIM Model,”
                            Journal of Policy Analysis and Management, vol. 12, no. 1, (1993): 189-194.




                            Page 48                                                                   GAO-13-64 529 Plans
                    Appendix I: Objectives, Scope, and
                    Methodology




                    on the CSPN website. CSPN provided us with data on each state as of
                    July 2012. We analyzed the data for every state for both direct-sold and
                    advisor-sold plans on the following features: whether the state offers a
                    matching grant program, whether the state offers tax deductions for
                    contributions and the amount, whether the state offers tax credits for
                    contributions and the amount, types of investment options offered, total
                    contribution limits, and required initial contribution amounts. We also
                    analyzed the following fee categories: program manager fee, state fee,
                    annual account maintenance fee, miscellaneous fee, annual distribution
                    fee, estimated underlying fund expenses, total annual asset-based fees,
                    maximum deferred sales charge, and minimum initial sales charge.

                    Further, we compared CSPN disclosure principles with direct-sold plan
                    disclosure documentation for the five states we interviewed. We reviewed
                    the extent to which the selected states incorporated elements of the
                    CSPN disclosure principles and whether plan documentation was easily
                    comparable across states. Specifically, we compared whether the state
                    documents contained eleven elements outlined in the principles,
                    including: a summary of key features, an assessment of the individual
                    summary features, a statement of any guarantee by the state issuer or
                    the state, information on state tax treatment and other benefits,
                    information that the state offers more than one plan, fee descriptions, and
                    investment risks, among others. These elements were chosen based on
                    discussions with states and experts who identified plan fees, tax benefits,
                    and investment options as some of the most important features
                    consumers consider when choosing whether or not to participate in a 529
                    plan. In addition to recording whether states have disclosed the
                    information listed above, we assessed whether any information was
                    missing, where the information was located in the document, and any
                    other observations about the ability to find and understand plan
                    information.


Literature Review   We reviewed studies conducted by academics, researchers, industry
                    representatives, and federal agencies on why families choose to
                    participate in 529 plans and what features might serve as barriers or
                    incentives. We identified literature published since 2006, when Congress
                    passed the Pension Protection Act of 2006, Pub. L. No. 109-250, which
                    made permanent the tax-exemption on 529 plan distributions used for
                    qualified education expenses. Our review included scholarly/peer
                    reviewed material, government reports, hearings and transcripts,
                    trade/industry articles, association/nonprofit/think tank publications, and
                    working papers. We searched information sources such as EconLit,


                    Page 49                                                   GAO-13-64 529 Plans
                         Appendix I: Objectives, Scope, and
                         Methodology




                         ProQuest, ERIC, PolicyFile, WorldCat, ECO, PapersFirst, ArticleFirst, and
                         Academic OneFile. These online sources are nationally recognized
                         databases that index and abstract research literature. We selected search
                         terms to capture literature that specifically addressed 529 plans, college
                         savings plans, qualified state tuition programs, and prepaid tuition. Of the
                         32 studies we identified, 12 studies met the following criteria: 1) included
                         information on plan features in specific states, 2) addressed the
                         consequences for consumers of choosing one type of 529 plan over
                         another, 3) identified barriers or incentives for consumers to choose 529
                         plans, 4) included data collected by states on plan participation, and/or, 5)
                         included information on plan disclosures to consumers. All studies cited in
                         the report were reviewed by at least two GAO analysts. Studies that
                         included statistical methods were reviewed by a GAO statistician and
                         social science analyst. All studies were reviewed for methodological
                         soundness and to ensure that any limitations associated with study
                         methodologies were conveyed to readers in our report text, footnotes, or
                         this appendix.


Financial Aid Analysis   To understand the extent to which savings in 529 plans affect federal
                         financial aid awards, we interviewed Education officials in the Office of
                         Postsecondary Education. We also reviewed relevant statutory
                         provisions, the FAFSA, the Federal Student Aid Handbook, and other
                         Education documents related to calculating the EFC.

                         To understand the extent to which savings in 529 plans are considered in
                         state financial aid calculations, we interviewed officials from state financial
                         aid offices in six states. To select the state financial aid offices, we used
                         information from a 2009-2010 survey by the National Association of State
                         Student Grant and Aid Programs to identify states that indicated they
                         used a financial aid formula other than the federal methodology in their
                         primary needs analysis and/or provided special treatment for state 529
                         plans. For report consistency, we selected the same states selected for
                         529 plan site visit locations to the extent possible (i.e., where the data
                         supported the selection based on the criteria). We interviewed
                         representatives in the following state financial aid offices: Louisiana Office
                         of Student Financial Assistance, Michigan Office of Scholarships and
                         Grants, New York Higher Education Services Corporation, Pennsylvania
                         Higher Education Assistance Agency, Utah Higher Education Assistance
                         Authority, and State Council of Higher Education for Virginia.

                         We also selected six institutions from the states whose financial aid
                         offices were selected for interviews. To obtain a national perspective on


                         Page 50                                                     GAO-13-64 529 Plans
Appendix I: Objectives, Scope, and
Methodology




institutional financial aid and determine the best method for selecting the
individual institutions, we interviewed representatives at several financial
aid organizations including the Association of Private Sector Colleges and
Universities, the College Board, the National Association of Student
Financial Aid Administrators, the National Association of Independent
Colleges and Universities, and the American Association of Community
Colleges. In these interviews, some officials said that schools with larger
endowments were likely to require families to provide additional
information, such as that required on the College Board’s PROFILE
application, to award their institutional financial aid. 11 We matched the
2012-2013 College Board’s list of institutions that use the PROFILE
application with Education’s 2009-2010 Integrated Postsecondary
Education Data System to calculate endowment amounts per student at
public and private non-profit four-year institutions. We also reviewed the
list of schools that participate in the Private 529 Consortium and selected
at least one school that was also part of this group. One state did not
have an institution that used the PROFILE application so we reviewed
websites of postsecondary schools in that state to identify a school that
collected data in addition to the FAFSA. We interviewed representatives
at the following institutions: Xavier University of Louisiana, University of
Michigan, St. Lawrence University, Swarthmore College, University of
Utah, and University of Richmond.




11
   The College Board is a not-for-profit membership organization that provides college
students with financial aid support and scholarships. It also conducts research and
advocacy on behalf of students, educators, schools, and colleges. The PROFILE is an
application developed by the College Board to help institutions gather information used to
award nonfederal student aid funds.




Page 51                                                               GAO-13-64 529 Plans
Appendix II: Free Application for Federal
               Appendix II: Free Application for Federal
               Student Aid, 2012-2013



Student Aid, 2012-2013




               Page 52                                     GAO-13-64 529 Plans
Appendix II: Free Application for Federal
Student Aid, 2012-2013




Page 53                                     GAO-13-64 529 Plans
Appendix II: Free Application for Federal
Student Aid, 2012-2013




Page 54                                     GAO-13-64 529 Plans
Appendix II: Free Application for Federal
Student Aid, 2012-2013




Page 55                                     GAO-13-64 529 Plans
Appendix II: Free Application for Federal
Student Aid, 2012-2013




Page 56                                     GAO-13-64 529 Plans
Appendix II: Free Application for Federal
Student Aid, 2012-2013




Page 57                                     GAO-13-64 529 Plans
Appendix II: Free Application for Federal
Student Aid, 2012-2013




Page 58                                     GAO-13-64 529 Plans
Appendix II: Free Application for Federal
Student Aid, 2012-2013




Page 59                                     GAO-13-64 529 Plans
Appendix II: Free Application for Federal
Student Aid, 2012-2013




Page 60                                     GAO-13-64 529 Plans
Appendix II: Free Application for Federal
Student Aid, 2012-2013




Page 61                                     GAO-13-64 529 Plans
                  Appendix III: GAO Contacts and Staff

Appendix III: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  Michelle Sager, Acting Director, Education, Workforce, and Income
GAO Contacts      Security Issues, 202-512-6806 or sagerm@gao.gov.


                  In addition to the contact named above, Gretta Goodwin (Assistant
Staff             Director), Amy Anderson, Rachel Beers, and Laura Henry contributed to
Acknowledgments   all aspects of this report. Also making key contributions were Carl Barden,
                  James Bennett, Nora Boretti, Jessica Botsford, Jason Bromberg, Alicia
                  Cackley, Melinda Cordero, Patrick Dudley, Shannon Finnegan, Kim
                  Frankena, Mark Glickman, David Lewis, Ashley McCall, John Mingus,
                  Mark Ramage, MaryLynn Sergent, George Scott, Walter Vance, Kathleen
                  van Gelder, and Michelle Loutoo Wilson.




(131126)
                  Page 62                                                  GAO-13-64 529 Plans
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