NCPA - National Center for Policy Analysis

Expanding Education Savings Accounts

March 3, 2000

For the third time yesterday the Senate passed a bill to expand educational opportunities for the children of middle- and lower-income families. The Affordable Education Act (S. 1134) would expand Education Savings Accounts (ESAs) in a number of ways, including allowing them to be used for expenses from kindergarten through the 12th grade.

Existing law allows parents or others to contribute up to $500 to an ESA, an investment account where earnings can accumulate tax-free and be spent on education expenses with no additional tax. The tax savings could be substantial. The law restricts the use of ESA funds to college or adult education expenses.

The new bill would ease the restrictions by increasing the contribution limit to $2,000 a year, allowing contributions to both a prepaid state college tuition plan and an ESA benefiting the same student, and let corporations or nonprofit organizations use ESAs to set up scholarship funds for low-income children. Moreover, it would expand ESA uses to include expenses related to elementary and secondary education at public, private or religious schools and homeschools, in addition to college.

According to estimates by Congress's Joint Committee on Taxation:

  • By 2002, 14.3 million families would benefit from the bill; with about 10.8 million of them families with children attending public schools.
  • Seventy percent of the tax savings from these accounts would go to families whose income is less than $75,000 a year.
  • More than 75 percent of the children who benefit would go to public schools.

Congress has twice passed similar legislation, but President Clinton vetoed the measure each time. The 61 to 37 vote yesterday was six shy of the two-thirds needed to override a presidential veto, should the House of Representatives pass the bill as well.

Source: Joe Barnett, "Expanding Education Savings Accounts," Brief Analysis No. 313, March 2, 2000, National Center for Policy Analysis.

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