The Legislature is considering a bill that would increase college savings, slash student debt and, by improving access to higher education, strengthen our economy through shared prosperity.
Assembly Bill 1956 by Assemblywoman Susan Bonilla, D-Concord, would provide a 20 percent tax credit, targeted at lower- and middle-income Californians, for contributions to 529 college savings accounts.
The state already has income tax breaks designed to encourage savings and strengthen financial security. Just two examples: the deductions for IRA contributions and contributions to self-employed retirement plans. The college savings tax credit provided by AB 1956 should join that list.
The need for the measure is clear. California has the nation’s seventh largest income gap. The average annual income for the top 1 percent was $1.22 million in 2011. That was 26.8 times more than the average of $45,589 for the other 99 percent.
Numerous studies have demonstrated that obtaining a college degree is one of the best ways to close that gap and spread the wealth. The typical American with a four-year degree earns $1 million more over their lifetime than high school graduates. In California, the median income for bachelor’s degree holders is 90 percent higher than the median for high school graduates.
Unfortunately, we’re not doing a good job of ensuring every Californian has the opportunity to obtain a college degree. That’s particularly true when it comes to students of color. Black enrollment rates at University of California and California State University campuses have dropped dramatically.
Compared to their share of the population, Latinos are under-represented at every level of California’s higher education system. And they’re more than three times less likely to have college degrees than whites.
These negative trends don’t just crimp opportunity and prosperity. They sap our economic engine. California doesn’t have enough workers with college degrees to meet the demand from employers. In 2025, our state will have 1 million fewer college graduates than the economy will need.
How did we get to this point? Disinvestment and higher costs. The state slashed spending on higher education in the last decade, causing tuition to more than double at the UC and CSU systems.
Meanwhile, student debt has increased and graduations have declined.
In the fourth quarter of 2012, California had 3.8 million student loan borrowers – 73 percent more than in 2004. Over the same period, the average loan balance went up by 55 percent, to $25,700.
The rising costs have hurt graduation rates, especially among ethnic minorities. In a 2010 survey, 69 percent of black students who did not finish college cited the high cost of tuition, compared to 43 percent of whites.
Setting aside money to pay for college can help address the problem. But less than half of California families have any kind of college fund. And the families that do have 529 plans or other types of college savings accounts tend to be wealthier.
Enter AB 1956. By creating a refundable tax credit, this bill would encourage families to open college savings accounts, especially lower- and middle-income families. The credit would be available only to single filers earning $100,000 a year or less and joint filers earning $200,000 or less. Almost half the tax credit benefit would go to Californians earning less than $75,000.
Here’s what AB 1956 would accomplish in its first 20 years, according to an analysis by Blue Sky Consulting Group: Californians’ 529 accounts would hold an additional $950 million of college savings, and 49,620 more Californians would have accounts. Student debt payments would decline by $1.2 billion, and California would gain 10,840 additional college graduates.
Saving for college makes financial sense for families because they earn investment income on 529 plan contributions instead of paying interest on student loans.
By saving and investing, a family would pay on average $65,593 for their child’s college education. That same degree would cost $145,593 if families borrow to cover costs, according to the College Savings Plan Network.
California is one of 15 states that do not provide tax incentives or other programs that encourage residents to participate in 529 plans. That’s why we lag far behind the rest of the country in the number of 529 college savings accounts per child.
We can and should do more to help California families save for college. AB 1956 would help accomplish that. The cost is reasonable. It’s targeted to help those people who need it most. For a modest investment, California would receive a huge payoff.
Bill Lockyer is the California state treasurer.