Funding private school just got a little bit easier. A provision in the new federal tax law expands the use of tax-advantaged 529 accounts to include K-12 tuition. Established 20-plus years ago, 529 plans were created to help families save for college and accrue tax-free earnings on contributions. Will expansion push the private schoolhouse door open wide? It’s hard to say; hurdles precede widespread participation. Still, the scope of this reform shows how far school choice proponents have come in shaping policies favoring educational flexibility and freedom.
The ideological tide really has turned, bringing with it a federal tax code that’s far more supportive of parents’ choices.
Coverdell Education Savings Accounts have enabled parents, within income limits, to set aside funds and make tax-free withdrawals for K-12 expenses. But such accounts cap total annual per-child contributions at $2,000. 529 expansion allows families, regardless of income, to make substantially larger contributions, and then withdraw up to $10,000 annually per child, tax-free.
But, about those hurdles: States may need to amend their tax codes to sync up with federal law, according to Time. Some stipulate that “qualified expenses” are restricted to college costs. More than 30 states offer a deduction or tax credit for 529 contributions, so parents should track state changes moving forward. North Carolina lawmakers removed the state tax deduction on NC 529 Plan contributions several years ago.
Parents planning to open 529 accounts may also consider whether they’ll apply for financial aid down the road. Myra McGovern, vice president of Media at the National Association of Independent Schools (NAIS), says 529 expansion won’t impact NAIS’ financial aid formula, used by 2,000 private schools, “in the short term.” The current year’s formula is set. However, “529 plans are considered parent assets,” says McGovern, and will be “evaluated very conservatively in the mix of financial assets” in future formulas.
Another hurdle: educating parents; 529 plans are an enigma to many. A 2017 survey from financial services firm Edward Jones found just 42 percent of parents could identify 529s’ purpose, meaning parents may be missing out on key tax benefits. Participation in North Carolina’s 529 Plan is growing but limited: the State Education Assistance Authority maintained 136,766 NC 529 Plan accounts in 2017, a 3 percent annual increase.
Yet the potential for choice-driven change remains significant, particularly in North Carolina, an outlier in K-12 trends and a bellwether for reform. Nationwide, federal data show private K-12 enrollment fell from 5.9 million students in 1995-96 to 4.9 million in 2015-16 — a 17 percent drop-off. But North Carolina’s private enrollment increased 36 percent during that timeframe. Private enrollments did begin decreasing in 2008, not long after the Great Recession began — but rebounded in 2014-15 as momentum for choice intensified. That year marked the launch of North Carolina’s private school voucher program. A new state-funded education savings account will provide tuition funds to special-needs students next year.
Will 529 expansion drive private K-12 enrollment growth further? “I do think in broad strokes, it’s going to help,” says Joe Haas, executive director of the N.C. Christian School Association. “It expands options to parents who have the ultimate responsibility to educate children.” McGovern doesn’t anticipate big impacts nationally but affirms, “Anything that helps families afford private school is a positive development.”
Funding private school remains a heavy lift for lots of parents. Most children attend public schools, and will continue to do so. But tax reform that supports more families nationwide in making that choice? That is, unequivocally, a good thing.
Kristen Blair is a Chapel Hill-based education writer. She serves on the board of a North Carolina independent school.