A college is cutting tuition for 529 savers. It shouldn’t.

Washington College in Maryland is planning to cut tuition fees by up to $2,500 a year for families who have saved into tax-favored savings vehicles like 529 plans. Let us cut straight to the chase: it shouldn’t. The plan will reward those from affluent backgrounds and potentially trigger a merit aid-style arms race as other colleges feel obliged to follow its lead.

Another “scholarship” for the rich

The proposed “Saver’s Scholarship” will match, in the form of tuition reductions, fees paid out of a 529 or Education Savings Account. Washington College President Sheila Bair says it is “designed to reward that foresight and to encourage more such savings.” In practice, the scheme will simply reduce the cost of attending the college for students from higher-income homes. Bair admitted as much in recent congressional testimony: “I know that 529 plans are typically used by upper middle-income families, and I think that is ok.” She is right about the distributional implications of her plan, since college savings plans are an upper middle class pursuit:

The proposed scheme will clearly be regressive. But Washington College is just one institution, and a very small one at that, with just 1,400 students. So even if it is a misguided plan, in the grand scheme of things it will only have minimal impact. Why worry?

Merit aid, a salutary warning

Here’s the thing: we’re afraid we have seen this movie before. In the 1980s, Ohio Wesleyan University (enrollment 1,600) started offering “merit aid” to attract highly qualified students. Other colleges had considered such a move but rejected it on the grounds that it would trigger a bidding war. “Using such scholarships is likely to lead us into a cut-throat competition with other schools to ‘buy’ talent,” concluded Denison University’s Admissions and Financial Aid Council in 1977.

Prescient words, as it turns out: once Ohio Wesleyan moved, the cycle became unstoppable, as Stephen Burd of the New America Foundation has documented, with its weaponized use extending to public flagship universities. Virtually non-existent in 1980, merit aid grew so dramatically from 1995 to 2008 that those receiving such ‘merit’ awards rivaled the number of students receiving need-based aid.

As the Chancellor of the University of Wisconsin system, Rebecca Blank has seen what is happening first hand:

It worries me a great deal, the type of merit aid I see being offered to top students from Wisconsin…As far as I’m concerned—I’m an economist—that’s a real waste of where we should be spending our money in higher ed. But I’ve got to keep some of those top students in Wisconsin. We’ve got to play in that game. We just have to…It is one of these arms-race things that I’m not happy with but I don’t quite know what to do about.

When somebody as brilliant as Becky Blank doesn’t know what to do, you know we’re in trouble. But we do know this. The best way to prevent an arms race is not to start it in the first place. Hopefully Washington College will abandon the idea. If not, we can only hope other colleges are wise enough not to follow their lead.