Maryland residents who enroll in the state’s 529 college savings plans next year could receive an annual donation of $250 from the state thanks to legislation approved by the general assembly.
State officials have agreed to offer matching grants to encourage low- and moderate-income residents to participate in Maryland’s 529 plan. Wealthy families readily use these investment plans because the earnings typically are free from federal and state taxes so long as the funds are used to pay for college expenses. To get a wider range of families on board, Maryland will now match contributions on a sliding income scale.
An individual earning less than $50,000 or a couple pulling in less than $75,000 would receive the $250 grant for contributing $25 to the account. At the high end of the scale, families earning $175,000 would have to contribute $250 to receive a $250 match.
Households with incomes above $175,000 are not eligible for the state match. Legislators lowered the income cap amid concerns that the previous $225,000 threshold would be a give-away for affluent families and defeat the point of the match program.
“The way that the state is providing the match is much more progressive for lower-income families, and much more progressive than many of the tax incentives that exist in other states,” said Ezra Levin, associate director of government affairs at the Corporation for Enterprise Development (CFED), which advocates for child savings plans. “Far more common in other states is something that looks like a deduction or even a nonrefundable credit that isn’t going to help low-income families very much.”
Levin said he suspects Maryland might find it challenging to get low- and moderate-income families to participate, even with the state contributions. Maine, one of 11 states that offer matching funds, struggled to enroll low-income families even with $500 on the table. After a few years of outreach campaigns that failed to attract that population, Maine decided to automatically open the accounts for residents at birth and allows families to opt out, rather than wait for them to opt into the program, Levin said.
“You could envision a Maryland program that just creates an account for everybody at birth, with the same incentive being proposed,” Levin said. “There need not be a budget impact, or not a large one, to creating the accounts. The best practice we’ve seen is $25, $50, $100 or $500 to automatically start off the account.”
Maryland’s two college savings plans have been growing in popularity in recent years, said Lauren Shipley, executive director of College Savings Plans of Maryland. More than a quarter of a million people were signed up for the plans in 2015, a 7 percent increase from the prior year, and the plans had $4.1 billion in assets. A majority of those people have investment accounts instead of prepaid plans the state offers to let families lock in tuition at local public universities.
Because household income is an optional question on the application, it is difficult to say exactly who is taking advantage of the plans, Shipley said. The comptroller’s office found high-income families benefit the most from the tax deduction tied to the plan, she said.
“When we look at who’s participating in the plans across the state, the counties really participating on a high level are Montgomery County and Howard County,” she said. “That’s somewhat attributable to the fact that people there are having their own conversations outside of our marketing efforts.”
Shipley said the most effective way to engage residents is through employers and school systems. Her team partners with schools in Prince George’s and Howard counties to get the word out to parents, and her team works with the Hartford County government to make employees aware of the benefits of the college savings plans.
“When we get those extra people engaged to help us get that message out is when we’re most effective,” Shipley said.
Maryland’s plans, which are managed by T.Rowe Price, routinely rank among the best in the nation by Morningstar, a fund research firm that puts out an annual review of college savings plans. The state offers relatively low expense ratios, ranging from 0.11 percent to 0.80 percent, but charges an annual fee of $10 for accounts that don’t have automatic contributions or a minimum of $25,000.
The matching program will be available for accounts created after December 31 for Maryland residents. It will cost the state about $5 million for the first year and $10 million annually by 2020.
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