Education accounts scrutinized in wake of tax reform

Rabbi Ariel Sadwin of Agudath Israel of Maryland. Photo courtesy of Ariel Sadwin.

As soon as President Donald Trump signed tax reform into law last month, Rabbi Ariel Sadwin’s phone started ringing. The new law set off uncertainty among day school parents and administrators over changes it makes to 529 college savings accounts.

And Sadwin, the director of the Orthodox advocacy group Agudath Israel of Maryland, found himself fielding calls from people worried that the new law was going to make day school education more expensive.

“Right away, I started getting asked, ‘Does this mean they’re going to start charging us more if we put money in [529 accounts]? Does this mean tuition is going to go up?’” he said. “Everybody’s always rushing to the doomsday scenario. But if schools see that there’s extra assets that weren’t there before, they might start asking why they’re giving such a massive tuition reduction.”

Previously, parents were able to withdraw from the tax-exempt accounts only for college tuition. Under the new federal law, they can use the funds to pay for private K-12 education.

Critics say it will further encourage wealthier students to abandon the public school system. But even some day school families who receive financial aid are concerned they could ultimately be punished for saving for their child’s college education.

Commonly, families qualify for a sliding scale of assistance at day schools, with less affluent families receiving more aid and wealthier families getting less or none. The question is how any assets in a 529 college fund will factor into that equation when day schools send out tuition bills for the 2018-19 school year.

David Sloan, president of Berman Academy in Rockville and the father of four children who attend the Orthodox school, said about one-third of the school’s 700 parents receive some form of aid. The annual tuition for an upper school student is more than $20,000, plus a $1,000 membership charge for Kehilat Pardes, the school’s affiliated synagogue. But Sloan said the school doesn’t yet know how it will factor in 529 accounts.

“We’ve only just started that process of looking into it, based on the fact that the effects may change from state to state. We’re making sure to do our modeling based on our costs and our families,” Sloan said. “In the broadest sense, what we’re going to try to do is engineer a way for our families to benefit from the state tax deduction they could get by paying at least some portion of tuition through 529s.”

He said Berman uses a third-party provider to review a family’s financial circumstances and determine what aid it qualifies for.

Sloan and Sadwin (who also heads the Maryland chapter of the Council of American Private Education) agreed that the new tax provisions will benefit Jewish day school families. In the District of Columbia, contributions to the savings accounts of up to $8,000 per year are tax-deductible. In Maryland, that figure is $5,000 and in Virginia it’s $4,000.

In the time between mid-December, when the final details of the tax bill emerged, and the new year, it may have made sense for some families to open or contribute more to their accounts, according to Sadwin. But now that 2017 is over, Sadwin’s advice is simple: talk it over with a tax professional.

In the meantime, he said Agudath Israel and others will turn their lobbying efforts to state legislatures. Maryland and Virginia’s state houses convened for their respective sessions this week, and both will be considering how the new federal law will affect state coffers and tuition-paying families.

“The conversation in Annapolis is just beginning,” he said. “We’re going to do whatever we can to influence policy for the benefit of our schools and our communities.”

For families receiving financial aid, though, the calculus may not be so simple.

The new law will be a high priority at an upcoming meeting of the finance committee of Beth Tfiloh Dahan Community School in Pikesville, according to Zipora Schorr, the Orthodox day school’s director. The school, where tuition for grades 5-12 ranges from $19,400 to $21,600, is — like everyone else — just trying to figure out what it all means.

“Our overall feeling is that it will not adversely affect financial aid, since for the most part the recipients of financial aid do not have discretionary funds to put into a 529,” Schorr said in an email. “If parents can pay out of a 529, I see it as a boon both to the parents and to the schools.”

But Sadwin acknowledged that the concern he’s hearing isn’t completely unfounded. He encouraged parents to trust that their schools will be reasonable when considering their individual circumstances.

If a family is suddenly increasing its contribution to its 529 account, that may be viewed differently than funds set aside by a grandparent for college.

“There’s no regulated process for how tuition committees are going to treat it,” Sadwin said. “My guidance is: relax. See how it plays out and trust that the schools are going to do the right thing. But that’s not a blind trust.”

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