Saving for College Through Qualified Tuition (Section 529) Programs

Linda Levine
Specialist in Labor Economics

Congress has tried to make higher education more affordable by providing favorable tax treatment to savings accumulated in qualified tuition programs (QTPs), also called Section 529 programs after their citation in the Internal Revenue Code. QTPs initially allowed individuals to save for qualified higher education expenses (QHEEs) on a tax-deferred basis. The Pension Protection Act of 2006 (PPA) made permanent the temporary enhancements to the Section 529 program contained in the Economic Growth and Tax Relief Reconciliation Act of 2001, including making qualified withdrawals from QTPs tax-free. Most recently, a provision expanding Section 529 qualified expenses in 2009 and 2010 to computer technology or equipment or internet access and related services was included in the American Recovery and Reinvestment Tax Act of 2009 (P.L. 111-5).

One type of QTP, prepaid tuition plans, enables account owners to make payments on behalf of student beneficiaries for a specified number of academic periods/course units at current prices thereby providing a hedge against tuition inflation. States were the only sponsors of prepaid plans until Congress extended sponsorship to eligible higher education (private) institutions effective in 2002.

States remain the sole sponsor of the more popular type of Section 529 program, college savings plans, which account for most of the assets in QTPs. College savings plans can be used toward a variety of QHEEs at any eligible institution regardless of which state sponsors the plan or where the beneficiary attends school. In contrast, if beneficiaries of state-sponsored prepaid plans attend out-of-state or private schools, the programs typically pay the same tuition that would have been paid to an eligible in-state public school. Also unlike prepaid plans, in which the state plan invests the pooled contributions with the intent of at least matching tuition inflation, college savings account owners can select from a range of investment portfolios. College savings plans thus offer the chance of greater returns than prepaid plans, but they also could prove more risky. Additionally, college savings plans charge fees (e.g., enrollment fees and underlying mutual fund fees) that lower returns—more so for accounts opened through investment advisors (e.g., sales charges).

Both types of Section 529 programs have several features in common beyond qualified withdrawals being tax-free. Earnings not applied toward QHEEs (e.g., the beneficiary forgoes college) generally are taxable and subject to a penalty. The tax and penalty can be avoided if account owners designate a new beneficiary who is an eligible relative of the original beneficiary. Account owners, rather than beneficiaries, maintain control over the funds. Contributions are not deductible on federal income tax returns.


Date of Report: September 13, 2010
Number of Pages: 14
Order Number: RL31214
Price: $29.95

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Department of Education Proposed Rules for Postsecondary Education Programs that Prepare Students for Gainful Employment in a Recognized Occupation

David P. Smole
Specialist in Education Policy

Among the types of postsecondary education programs eligible for participation in the federal student aid programs authorized under Title IV of the Higher Education Act of 1965, as amended (HEA), are those that, as a condition for eligibility, must prepare students for gainful employment in recognized occupations. These programs are offered by public and private nonprofit institutions of higher education and postsecondary vocational institutions, and by for-profit, proprietary institutions of higher education. A large proportion of these programs, however, are offered by proprietary institutions of higher education. 

The U.S. Department of Education has issued proposed rules on programs that must prepare students for gainful employment in an attempt to address concerns about the quality of the programs and the amount of student loan debt that students who attend such programs incur. The proposed rules would apply to certificate and other non-degree programs offered by public and private nonprofit institutions of higher education and postsecondary vocational institutions, and to nearly all programs offered by proprietary institutions. 

The proposed rules establish a series of reporting and disclosure requirements and a set of three performance measures tied to student loans. The performance measures appear to be designed to assess program effectiveness on the basis that if a program's students have sufficient earnings from employment to be able to repay their student loans, the program has prepared its students for gainful employment. A loan repayment rate measure would assess how effectively program attendees repay the student loans they borrow to attend these programs. Two debt-to-earnings measures would assess the relationship between the student loan debt of program completers and their earnings. A more stringent and a less stringent performance threshold would be established for each of the three measures. 

Programs that meet the more stringent performance threshold for at least one of the three measures would remain fully eligible to participate in HEA, Title IV programs. Programs that do not meet the more stringent threshold for any of the measures but do meet the less stringent performance threshold for at least one of the measures would remain eligible to participate in HEA, Title IV programs, but they would become subject to sanctions, including having their enrollment of students who receive Title IV federal student aid restricted. Programs that do not meet at least the less stringent criteria on any of the three measures would lose their Title IV eligibility. 

This report explains and provides observations on the Department of Education's proposed rules on gainful employment. .


Date of Report: September 9, 2010
Number of Pages: 23
Order Number: R41397
Price: $29.95

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Education Jobs Fund Proposals in the 111th Congress

Rebecca R. Skinner
Specialist in Education Policy

Steven Maguire
Specialist in Public Finance

During the 111th Congress, both the House and Senate have considered various pieces of legislation that would provide funds to prevent teacher layoffs. These proposals have generally been referred to as proposals to create an Education Jobs Fund. The first Education Jobs Fund was included by the House in H.R. 2847, the Jobs for Main Street Act. It was not retained in the final bill. More recently, the Education Jobs Fund was included in the Supplemental Appropriations Act, 2010 (H.R. 4899) by the House, but the domestic spending provisions added by the House through amendment were not agreed to by the Senate. Ultimately, the FY2010 Supplemental Appropriations bill did not include funding for an Education Jobs Fund. 

On July 29, 2010, Senator Reid proposed an amendment (S.Amdt. 4567), on behalf of Senator Murray, to add the Education Jobs Fund and a state Medicaid package as a substitute amendment to the FAA Air Transportation Modernization and Safety Improvement Act (H.R. 1586). The substitute amendment was scheduled for a cloture vote on August 2, 2010. The vote was tabled after the Congressional Budget Office determined that the amendment would increase the deficit over both the five-year and 10-year budget intervals. Subsequently, Senator Reid filed a cloture motion on August 2, 2010, to consider S.Amdt. 4575 as a substitute amendment to H.R. 1586. The cloture motion passed by a vote of 61-38 on August 4, 2010. The Senate also voted 61-38 to waive a budgetary point of order brought against the amendment by Senator Gregg. On August 5, 2010, the Senate passed S.Amdt. 4575 by a vote of 61-38. The House agreed to H.R. 1586, as amended by S.Amdt. 4575, on August 10, 2010. H.R. 1586 was signed into law by the President later that day (P.L. 111-226). 

Under H.R. 1586, the Education Jobs Fund will be administered generally under the terms and conditions that applied to the State Fiscal Stabilization Fund under the American Recovery and Reinvestment Act (ARRA; P.L. 111-5, Sections 14001 through 14013). For example, funds will be distributed to states using the same formula used to distribute funds under the State Fiscal Stabilization Funds. States are required to distribute funds to local educational agencies (LEAs). Under H.R. 1586, LEAs can only use funds for compensation and benefits and other expenses (e.g., support services) necessary to retain existing employees, to recall or rehire former employees, and to hire new employees in order to provide early childhood, elementary, and secondary educational and related services. 

This report includes a summary of key provisions contained in H.R. 1586 related to the Education Jobs Fund. Estimated state grants based on the amendment's provisions are also included. It also discusses two issues related to the proposed amendment with respect to the timing of the funds and reporting requirements regarding the use of the funds. The report concludes with a brief discussion of the legislative history of Education Jobs Fund proposals during the 111th Congress.


Date of Report: August 20, 2010
Number of Pages: 18
Order Number: R41353
Price: $29.95

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