Parents in many states can now get a state tax deduction for private school tuition, thanks to the federal tax overhaul passed last month.
A lesser-known part of the new law lets families use state-sponsored 529 college savings plans to pay for expenses such as tuition, books, and tutoring for kindergarten through high school.
State Implementation Variances
While Missouri families can automatically use 529 monies for K–12 expenses, state law will have to be changed for the new provision to apply to Illinois families, according to the Illinois treasurer’s office.
Tax Deduction Limits
Missouri residents can deduct from their state taxes up to $8,000 a year for contributions to 529 plans.
Illinois residents would be able to deduct up to $10,000 per child each year if the law is changed to allow it.
Impacts of 529 Plan Usage for K–12
The original idea for such savings plans was to have families invest money over a long period of time for college expenses. Using 529 funds for elementary and secondary education significantly shortens the time families would have to grow their money.
Still, using 529 plans is a no-brainer for private school parents because they can simply deposit the money they were going to spend on tuition anyway and get an automatic tax discount, said Nat Malkus, deputy director of education policy for the American Enterprise Institute.
“You’d be pretty dumb not to do it,” Malkus said. “It’s a pretty direct transfer, led by a change in federal statute, from the Missouri treasury to private school parents.”
Enrollment and Potential Tax Impact
Missouri had 110,000 private school students in the 2015–2016 school year
Illinois had 231,300 private school students, according to the National Center for Education Statistics
By Malkus’ estimates, if every private school family took full advantage of the 529 plan:
Missouri could miss out on roughly $42 million a year in state income taxes
Illinois would miss out on roughly $90 million
That doesn’t even account for the possibility that more families will enroll in private school.
Concerns from Public School Advocates
Public school supporters worry that this diversion of money will hurt public schools, because less state revenue could mean less state aid for public schools.
“Philosophically, we just have a problem with that when, whether it’s state money or federal money, is used to subsidize private schools that are not held accountable to the public in the same way public schools are,” said Brent Ghan, deputy executive director of the Missouri School Boards’ Association.
Missouri’s potential tax loss to the education savings plans comes on top of other anticipated state tax revenue losses from the tax overhaul. One study predicts Missouri will lose $58 million under the new federal tax plan.
Perspectives on School Choice and Middle-Class Relief
The expansion of 529 plans to include private and home school expenses could be considered a win for supporters of school choice. But some experts say it will mostly benefit parents who are already paying private school tuition, because the tax deduction may not be large enough to offset the cost of new tuition payments for lower-income families.
Missouri Treasurer Eric Schmitt, a father himself, touts this as a win for middle-class families. His office plans to be “pretty aggressive” in promoting and publicizing the new 529 option, he said.
“For me, I’m always supportive of anything that could provide middle-class tax relief,” he said.
Outreach by Private Schools
Private schools also say they will do all they can to inform families.
“School boards, teacher associations, parent associations, we’ll use every vehicle we have,” said Sister Nathalie Meyer, interim director of Catholic education for the Archdiocese of St. Louis, which is the largest private school system in the St. Louis area. “Anything that gives our parents some options so that they can consider Catholic schools is wonderful.”
529 Plan Statistics
There are more than 500,000 accounts in Illinois with more than $10 billion in assets, according to the Illinois treasurer’s office.
There are currently about 154,500 active 529 plans in Missouri, with a collected value of about $3 billion in assets, according to the Missouri treasurer’s office.
Frequently Asked Questions
What is the new tax benefit for private school tuition?
Parents in many states can now use 529 college savings plans for K–12 private school tuition and other educational expenses like books and tutoring, due to changes in the federal tax law. This can provide state tax deductions, depending on where you live.
Can all states immediately implement the 529 plan expansion for K–12 expenses?
No, implementation varies by state. Missouri allows immediate use of 529 funds for K–12 expenses, while Illinois requires a change in state law before the provision can take effect.
How much can be deducted from state taxes for 529 contributions?
Missouri residents can deduct up to $8,000 annually for 529 contributions. If Illinois amends its law, residents could deduct up to $10,000 per child per year.
Will using 529 plans for K–12 affect long-term savings for college?
Yes, using these funds for K–12 shortens the investment time horizon, potentially reducing compound growth that could have been used for college tuition. Still, it provides immediate tax benefits for those already paying private school tuition.
How might this policy affect public schools?
Public school advocates are concerned that reduced state revenue due to widespread use of 529 deductions, may result in less funding for public schools, which rely on state aid. This has sparked debates over equity and accountability.
