New Tax Law Rewards Rich Parents For Sending Their Kids To Private School

by Megan Zander
Image via lillisphotography/Getty Images

529 plans can now be used to pay for private and religious K-12 education

The newly passed Republican tax law seems to go out of its way to keep money firmly within the hands of the wealthy and to continue to widen the education gap between classes. Tax-free savings accounts known as 529 savings plans, which were formerly limited to college expenses, can now be used to fund private and religious K-12 education, giving those who can afford it the ability to withdraw $10,000 per year from the account to pay for tuition and other school-related costs.

Up until the end of last year, a 529 savings plan was basically a college savings account, charmingly named after its section in the tax code. The idea was for parents to put funds in as their child grows. The government invests the money. Hopefully by the time the child is old enough to go to college, they’ve got a nice little nest egg to help them out with tuition and expenses that they can use, tax free. To make the plans even more enticing, 33 states plus D.C. sweeten the pot by giving parents a deduction or credit on their state taxes for putting money into a 529 fund in a given year. Sounds great, right?

The good news is that you can still use a 529 plan to save for college.

But it’s the new changes to 529 plans, thanks to a last minute bill amendment by Sen. Ted Cruz, that seem to give those with deep pockets a big benefit over the rest of us. People who have Scrooge McDuck levels of cash lying around can now also use a 529 plan to help fund private and religious K-12 education by “superfunding,” or essentially, putting a chunk of cash into a 529 up front, and taking out the $10,000 each year to pay for elementary and high school tuition expenses, all while getting those state tax benefits. “This change allows private school families to put their money through 529 accounts and avoid state income taxes,” Nat Malkus, who studies education policy at the American Enterprise Institute, told NPR.

The Tax Cuts and Jobs Act of 2017 (no shitting, that’s really what the new tax law is actually titled) also did away with Coverdell Education Savings Accounts, an income-restricted program that allowed families to save up to $2,000 per year for K-12 and college education-related expenses like uniforms or books.

Earlier proposals to end a $250 deduction used by teachers to offset the cost of classroom supplies and to allow 529 funds to be created for children who are still “in utero” (can you say backdoor abortion ban?) ultimately failed to make it into the final version of the tax bill. Phew to that at least.

Of course “School Choice” cheerleader and Education Secretary Betsy DeVos is all about the new provision of 529 plans. Speaking to Education Week, she called it “a good step forward” and a reflection “that education should be an investment in individual students, not systems.”

But let’s be honest — this isn’t about giving parents more choices or increasing the number of kids in private schools. The new 529 plan terms are most useful for sending kids to private school if you’ve got this year’s tuition money (at least) already on hand. This creates a lovely bonus for those who have the means to work the system. But does it really give more kids a chance at a better education? Not even close.

Matthew Chingos, a senior fellow and director of the education policy program at the Urban Institute agrees. “You’d have to have enough money to not just pay for private school but to save for private school,” he told Mother Jones. He says the new system will definitely benefit some more than others. “If you are trying to save up enough to send your child to a Catholic school for $6,000 a year, the tax benefit on those savings isn’t going to be that much,” he said. “If you know you are going to send your child to a fancy private school in DC that costs $40,000 a year, then you could start stocking money away into one of these accounts and get a pretty big tax benefit. But who’s going to get that? It’s going to be pretty wealthy people.”

Sounds about right.