Publisher's note: The author of this post is Harry Painter, who is a writer for the John W. Pope Center for Higher Education Policy and a contributor to the Carolina Journal, John Hood Publisher. Jenna Ashley Robinson, the Pope Center's director of outreach, contributed to this article.
Decision to drop 529 funding would not reduce N.C. taxpayer outlays
RALEIGH The federal proposal that the president is calling "America's College Promise" has inspired fanfare and controversy that go beyond President Obama's decision earlier this week not to interfere with so-called 529 savings plans.
On Jan. 9, Obama pitched a proposal making the first two years of community college "free for everybody who's willing to work for it." He defined "work for it" as maintaining a 2.5 grade point average (a B- or C+) while enrolling at least half time, and making "steady progress" toward completion.
In his State of the Union address on Jan. 20, the president expanded on his proposal, suggesting it be paid for by tax increases on the wealthy and "simplifying" taxes for Pell grant recipients. The Obama administration said it would pick up 75 percent of the tab nationally and require states to pay for the rest.
The idea is inspired by existing programs in Tennessee and Chicago, called "Tennessee Promise" and "Chicago Star Scholarship." The administration is touting America's College Promise as a bipartisan effort that would boost the middle class by aligning their skills with the growing need for an educated work force.
The president initially said America's College Promise would be funded by taxing withdrawals from 529 plans. These investment vehicles allow families to set aside money for higher education and withdraw the proceeds tax-free, so long as the earnings were used for college expenses. Obama's proposal would have treated 529 withdrawals as ordinary income.
Critics from across the political spectrum — including Republican House Speaker John Boehner of Ohio and Democratic House Minority Leader Nancy Pelosi of California — lashed out at the proposal, saying it would remove a well-established incentive for parents to save for their children's education.
Obama dropped the funding scheme a week after the State of the Union address, though the fate of other proposals to offset the cost — including an increase in the federal tax rate on capital gains and elimination of tax-free savings accounts for child care expenses — is unclear.
If Congress enacted Obama's program, whether or not it's funded fully at the federal level, the obligation to state taxpayers would remain.
Attending community college is already free for many low-income students who qualify for Pell grants. Thus, the president's plan primarily would benefit middle-class students. While not all the details have been laid out, it appears that, as with Tennessee Promise, the federal subsidies under his plan would kick in once students have exhausted Pell grants and other options.
The Pope Center dug through some numbers from the Department of Education's Integrated Postsecondary Educational Data System to estimate what America's College Promise might cost North Carolina taxpayers.
To start, eliminate all students receiving Pell grants, because Pell covers 100 percent of tuition and fees for the 58 schools in the North Carolina Community College System.
As of 2012, the last year of available data, the average sticker price for tuition in the system was $2,176 plus $102 in fees — a total of $2,278 — and no college charged more than $3,000. The average Pell Grant in the state was $4,004, easily enough to cover tuition at any community college.
Pell grants are phased out as income goes up and the cost of attendance goes down, so some higher-income students may receive much less than the average. However, we can be pretty sure that enrollment in any community college in North Carolina is already tuition-free for most Pell recipients — certainly those with low incomes. That proportion of community college students that were Pell recipients in 2012 was 53 percent.
Megen Hoenk, a spokeswoman for the community college system, told the Pope Center that in fall 2013, about 200,000 students were enrolled at least half-time in the state. About 125,000 (63 percent) of them had a cumulative grade point average of at least 2.5 through that semester. That means 37 percent, or about 75,000, would not qualify for the federal free tuition because of low grades.
Assuming that those numbers and the percentage of Pell recipients held steady under Obama's plan throughout the calendar year, we can estimate how much North Carolina could be expected to spend to participate in America's College Promise.
If current trends continue, we can estimate that North Carolina would spend between $16.7 million and $33.5 million per year — the lower number for a population of all half-time students, and the higher number for a population of all full-time students. For reference, the community college system budget for the current fiscal year is a little over $1 billion.
Remember that those numbers assume current trends would continue under Obama's plan, which was not the experience in Tennessee. Officials in the Volunteer State report that close to 90 percent of its high school graduating class applied in the first year of its program.