Association for Public Policy Analysis & Management

This paper examines various factors that determine the choice of financing for college tuition, and focuses on the tension between 529 college saving plans versus student debt in a rising tuition cost environment.  Tuition costs have steeply increased over time, more than doubling at public institutions over the last 15 years.  At the same time, enrollment at postsecondary institutions and college has steadily increased, while median family income has slightly declined.  To compensate for the increased tuition costs, student grant aid has become more broadly available.  However, the unprecedented financial burden on families has generated an increased reliance on borrowing and 529 plan savings, a type of tax-favored savings vehicle dedicated to future expected educational expenses.  Over the past decade, 529 plan savings have been growing at the same rate as student loans, reaching record high levels of nearly $250 billion in 2015.

In this paper, we combine data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel (CCP), College Savings Plans Network (CSPN) and Trends in College Pricing College Cost reports to examine whether families increase their savings in 529 plans when their state’s public college tuition increases.  We further investigate the relationship between 529 plan savings and student debt.  The richness of our data allows us to examine which households’ characteristics affect the choice of type of financing for college.  For example, the CCP provides quarterly Equifax credit-report data for a unique, representative, longitudinal panel of individuals and households starting in 1999.  The sample includes approximately 40 million individuals in each quarter.  All individuals have a social security number and a credit report, and are clustered by household if they live at the same primary address. Our data include not only general information about each borrower, such as age, credit score, zip code but also more granular information about individual student loans such as account opening date, current balance, and payment status.  CSPN selectively publishes plan-level data on 529 plans by plan type, consisting of total assets under management and the number of opened accounts at the end of each period.

We use simple OLS regression analysis to examine the correlation between a variety of economic, demographic, and policy factors and how families in a given state choose to finance college.  The specific factors examined include household characteristics (income, leverage, age, education), state wide characteristics (such as tax deductions and credits, income, average state tuition costs), and market wide conditions (such as interest rates, grants).  First, we estimate the impact of tuition changes on student debt and 529 plan savings, and then examine how student debt and educational savings are jointly used to finance college education.  Finally, we use a differences-in-differences identification strategy that compares tuition, student debt, and 529 plan savings for states that offer preferential 529 plan treatment for in-state participants, relative to those who do not.  Our results lend insights into how incentives embedded in the U.S. higher educational system disproportionately favors borrowing over saving.