American families may contribute to tax-advantaged savings accounts known as 529 plans to save for a child’s college and graduate education. These plans have come under scrutiny in recent years as favoring upper-income households, who use them at much higher rates and derive a greater benefit from the tax savings therein. However, less scrutinized is the federal government’s student loan program, which offers student borrowers loan forgiveness after 20 years of payments. Due to changes lawmakers adopted in 2010, this program also has the potential to deliver sizable benefits to upper-income families.

In this report, we analyze whether a 529 plan or the IBR program provides larger benefits to upper-income families. Specifically, we examine the potential benefits a hypothetical family and student would receive by financing an undergraduate and graduate education using a 529 plan or using IBR to repay federal student loans. We find that for a typical upper-income household, the loan program and IBR provide more than twice the benefits of a 529 plan.

Importantly, this brief does not provide a distributional analysis of the benefits of 529 plans and federal student loans. We are not able to assess how much total government subsidy each group of beneficiaries receives under IBR or 529 plans. However, our focus is on the magnitude of each program’s subsidy to upper-income families rather than the distribution of that subsidy among families of different income levels...

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