Jacques: 529s for private schools? Fat chance
Parents and grandparents (or anyone) can put their hard-earned money into college savings plans for loved ones. And those funds can be used for all kinds of higher education-related activities, including extracurricular courses like ballroom dancing and archery.
But until now, that money wasn’t applicable to any K-12 expenses. The federal tax reform legislation, however, broadened the use of 529 accounts to include elementary and high school costs, as well as private schools.
Don’t get too excited about benefiting from that change, though. Especially if you live in Michigan.
In all the hoopla over the tax overhaul late last year, the 529 amplification didn’t get a whole lot of attention. According to EdChoice, a national group that promotes educational freedom, the tax reform “expanded the use of 529 savings plans so that parents can now use these funds for up to $10,000 per year in qualified K-12 education expenses in addition to college expenses.”
Robert Enlow, president and CEO of EdChoice, says the new 529 options “will allow some additional choice” and is “another tool that parents can use.”
Sounds promising, right?
State officials around the country are trying to figure out what it means for them. Michigan is one of nine states requiring a legislative change to address the new parameters.
“We are focused narrowly on the federal law and how it affects state law,” stated Ron Leix, spokesman for the Michigan Treasury Department. “We anticipate an answer in the next couple of weeks.”
Expect that answer to put a damper on any expansion of private school choice in Michigan. That’s because this state constitution has some of the strictest language in the country preventing any public dollars — directly or indirectly — from benefiting a private school.
A recent example is the Legislature’s attempt in two budgets to include a small amount of funding to reimburse private schools for state-mandated health and safety provisions. Yet even that spurred a lawsuit from a variety of groups, including the American Civil Liberties Union of Michigan. Last summer the Michigan Court of Appeals ultimately denied the state’s attempt to send the allotted $2.5 million to qualifying private schools.
Most states mirror their 529 language to match federal guidelines, so many states will probably allow families to use these funds they’ve put away for college on K-12 schools, if they so choose.
The 529 plan in this state, the Michigan Education Savings Program, benefits families in several ways and the plans are popular. As of last fall, there were more than 243,000 accounts with roughly $5 billion in assets. Earnings grow free from federal income tax, which adds up significantly over time, and Michigan also offers a state income tax deduction for contributions. As long as withdrawals are used for qualifying expenses, then they are tax free at both the state and federal levels. The accounts are capped at $500,000 here.
It’s because of those tax perks that Michigan would potentially prevent any 529 savings from going to a private K-12 school.
Even if the treasury were to sign off on the change, the state would be slammed by lawsuits from those who are quick to defend the turf of traditional public schools.
State Sen. Patrick Colbeck, R-Canton, has introduced legislation to address the 529 alteration, but he’s realistic about what’s possible. His bills, which have already passed the full Senate and the House Education Reform Committee, would expand the 529 accounts to cover extracurricular expenses or special education services at K-12 public schools — but not private ones.
Not yet, at least, given the constitutional realities.
Enlow anticipates that if Michigan refuses to allow families to use the 529 funds for private schools, it could backfire on the state and make it even more of an outlier for school choice.
This is one more reason why state residents should reconsider a constitution which is so restrictive and prevents families from spending their own money how they see fit.