FREOPP in the Wall Street Journal on the quiet revolution in education policy

Today we published an op-ed in the Wall Street Journal on how the significant expansion of 529 accounts in the One Big Beautiful Bill Act paves the way for student empowerment and parental choice. We describe the “quiet revolution” in motion on education policy.  “On the heels of the rapid spread of Education Savings Accounts at the state level, Congress has made federal policy far more favorable for all types of education: foundational, post-secondary, workforce development and lifelong learning.” 

For the first two decades after Congress created 529s, the accounts could be used only for higher education. That changed in 2017 when Congress expanded 529s to include K-12 tuition in the Tax Cuts and Jobs Act. This summer’s megabill transforms 529s into tax-free savings accounts for a broad range of K-12 costs, job training, workforce development, and even retirement and disability expenses. 

Building on the earlier FREOPP work, we lay out the implications of Congress’s game-changing education policy moves: “For years, investing in costly graduate degrees with questionable career returns and enforcing standardized education systems that fail to ensure basic reading and math proficiency for millions have proved inadequate. But 529 plans provide a flexible alternative for education spending, better suited to children and working adults seeking in-demand skills.” 

Coupled with the expansion of ESAs and the new school choice tax credit, the 529 expansion is good news for educational opportunity and workforce development. But access to 529s remains limited by state participation and parents’ inability to invest in these accounts. We note that while the federal government does not tax 529 funds, the funds remain taxable in some states. California residents who withdraw 529 funds to pay for primary or secondary education remain subject to state income taxes plus an additional 2.5 percent tax penalty. Other large states such as Colorado, Illinois, Michigan, and Minnesota continue to tax 529 distributions for K-12 tuition. “The stakes are now higher for states that don’t conform their laws to match the federal allowable uses of 529 funds,” we explain in the Journal, “[N]on-conformity with federal law now penalizes the parents of a special-needs child who attends a public school and wants to use 529 funds to pay for a tutor or the parent of a high-school senior who wants to use a 529 to become an HVAC tech.” By transforming 529s, the budget reconciliation bill signed into law last month “puts pressure on the political leadership of non-conforming states to remove barriers to upward mobility.” 

FREOPP has been recommending reforms to expand the allowable uses of 529 accounts and to help lower income families to save for K-12 and higher education expenses since 2021. Policymakers and the private sector should now build on the successful expansion of 529s by adopting policies to fund 529 accounts on a means-tested basis, since many lower- and middle-income families can’t afford to save for their child’s education. We cite research showing that participating families have benefited from state-level efforts to support 529 programs. They conclude their piece by noting that while the tide is turning, more work needs to be done: “The 529 revolution has begun. It will succeed only if states allow it to” and work with the private sector so that more low-income families can benefit. 

If you have a WSJ subscription, you can read the whole piece here.