Opinion: Investing in opportunity through inclusive 529 college savings plans

As they learn to read, sing songs together and run excitedly around the playground, it’s hard to imagine the nearly 65,000 kindergartners in New York City’s public schools one day going off to college or pursuing their dream career. But that future, however far away, beckons – and as the adults in their communities, it’s up to us to set up every kid to attain their goals. 

But it’s well-known that in New York City and across the nation, children aren’t starting on a level playing field. Income inequality makes it incredibly challenging for many families – especially Black and brown families – to save. Analysis of the generational wealth transfer underway replicates this dynamic, showing that across the country, white children stand to disproportionately benefit, and are vastly more likely to have the resources in place to afford college and pursue the career they want. It’s a profound problem – and one that in New York City, where over 65% of public school students are Black or brown, we’re tackling head on.

No fewer than 145,000 students across the city have NYC Scholarship Accounts today through the NYC Kids RISE Save for College Program, a public-private-community partnership with the Department of Education and the City of New York, initially funded by the Gray Foundation. More than $19 million has been allocated in the NYC Scholarship Accounts, and subsequently invested into a tax-advantaged college and career savings plan in New York state called the NY 529 Direct Plan, which provides access to investment earnings alongside federal and state tax breaks. Funds can be used to pay for qualified higher-education related expenses including at community colleges, trade and vocational schools, eligible apprenticeship programs, and online degree programs.

These 529 plans can offer an enormous benefit to low-income families for whom saving can be a struggle. But in practice the benefits of 529 plans have overwhelmingly accrued to families toward the top of the income ladder. In 2014, you had to visit at least five kindergarten classrooms in the lower income NYC neighborhoods to find one student with a 529 account, whereas in the highest income neighborhoods about half the students in a class had an account. 

As we have rolled out NYC Scholarship Accounts citywide, and supported tens of thousands of families towards college and career savings, we have learned many lessons about how to change these ratios. We’ve already worked with state Comptroller, Thomas DiNapoli, who has championed a series of initial reforms to better serve low- and moderate-income families, including making program materials available in Spanish, eliminating minimum and ongoing deposit requirement amounts, and accepting money orders as a form of contribution. 

These reforms are an important start, but there’s more to do to increase access to these important wealth-building tools, while supporting communities that have been historically excluded:

1. Create matching grants for low- and moderate-income investors

To encourage greater participation in 529 plans by low- and moderate-income families, New York’s 529 plans should also provide a financial boost for families to start investing. A number of states have implemented matching contributions for low- and moderate-income residents who invest in their plans. 

2. Translate plan materials, and make them easier to understand

If a parent or guardian can’t understand what a 529 plan account is and how to open one, odds are they’re not going to. New York’s 529 plans provide materials and support only in English and Spanish right now, locking out hundreds of thousands of families.

Further, even for native English speakers, the complexity and length of most 529 plans’ materials creates unnecessary barriers to opening a 529 account. This is especially true for parents and guardians with lower literacy levels. New York should lead the way in this complex regulatory environment by offering more accessible, plain language materials in print and digital form to help educate and encourage families to open an account.

3. Create a local investment option for plan participants

As one of the largest and most popular 529 plans in the country, with more than $38 billion in assets under management, the NY 529 Plan provides a powerful opportunity to invest in local communities. An investment option within the NY 529 Direct Plan that invests in affordable housing, local businesses, and other assets in New York neighborhoods has the potential to drive economic growth, job creation, and neighborhood improvements that ultimately enable students and families to earn more money and build more assets – all while generating returns for their college savings accounts.

4. Fund community-based education and outreach

Many families would open and invest in a 529 if they simply knew more about them. Given the variety of barriers--language barriers, technological barriers, informational barriers, and more--standing between a parent and a 529 account for their child, in-person assistance by trusted, trained community members is essential to expanding access. New York should invest in more on-the-ground education and outreach, supporting community-based organizations and service providers who already have relationships in their neighborhoods, because they are best suited to support families to understand and open 529 accounts. 

5. Measure the Inclusivity of Fund Managers

Because 529 plans are state-regulated, states have the power and responsibility to demand ongoing improvements to these plans from the financial institutions that manage them on behalf of families.

Independent evaluators, such as Morningstar, should add inclusivity metrics to their evaluation criteria for states’ 529 plans, and establish an Inclusivity Index, measuring these and other steps that 529 investment managers are taking to be inclusive. Such an index could evaluate actual uptake of 529 plans in low-income, nonwhite, and non-English speaking communities.

No one program alone can unlock true equity for New York’s children. The disadvantage that many face is a tangled web of generational racism across many systems– education, housing, financial markets. But 529 plans are a powerful tool to cut through some of the challenges, if they are deployed equitably. By adopting these steps, borne of years of experience helping families save, New York can lead the way to a more inclusive future for our children.