Here’s an idea. Did you catch the New York Times article a few weeks ago about the union-founded and owned Amalgamated Bank that has carved out a niche as the financial institution of choice for left-leaning non-profits and Democratic campaign committees? Well, maybe Amalgamated should pursue a mutually beneficial deal with its brethren union partners to provide a start up “College Fund for Every Union Family.”
Every state sponsors a 529 college savings plan. Investment returns on funds deposited in 529 plan accounts grow tax-free and can be accessed without penalty if used for postsecondary education costs. Anyone can have an account with any state’s 529 plan, regardless of their place of residence. People tend to go with their local state plan, though.
There are a handful of state 529 college saving plans that partner with traditional banks to offer participants a 100% secure, FDIC-insured investment vehicle. Ohio’s 529 plan, for example, has just such partnership with Fifth Third Bank. Amalgamated could form a similar partnership with any of the fifty state 529 plans. It could go further though and provide “a sweetener” for union members who sign up for that plan and direct deposits – maybe even via union dues – toward Amalgamated. Just like banks used to give away a free toaster when opening a regular bank account, Amalgamated could provide a $500 start-up seed deposit to every union member who wishes to open up a 529 college savings account with Amalgamated’s state plan partner(s).
The catch would be the union member beneficiary would have to agree to contribute at least say $2 per week in additional funds over the course of the year to their family’s 529 account and designate the total to be deposited in a 100% secure, FDIC-insured CD with Amalgamated. If after a year the union member wants to change up their investment allocation and put their college savings into something more risky that the state 529 plan offers, they can. Most won’t. People usually stick with defaults, including when it comes to paycheck deduction deposits. That’s not a bad thing in this case, because 529s are best thought of as vehicles to support and encourage saving and planning for college as opposed to as investment vehicles for working people; the stock market is a risky place for those who cannot afford to lose.
Self-Financing
Now, here’s how the $500 seed could be self-financing for Amalgamated. Say Amalgamated takes the $104 a union member deposits over the course of a year ($2 a week for 52 weeks) and uses it to finance consumer loans – mortgages, home equity loans, etc… Heck, Amalgamated could use 529 deposits to finance union-subsidized private student loans at say a 6% interest rate. Banks are issuing year-long CDs these days at 1% interest on savings. The difference, 5 percentage points, is enough of a spread to finance the $500 seed. And a 6 percent interest rate beats most private student loans and the Federal Parent PLUS loan. (Although federal loans do have other repayment benefits like deferral and forbearance.)
The big education deliverable though would be a minimum $500 college fund for every union member willing to make a nominal weekly contribution of $2 a week for a year. That’s a college fund that will grow tax-free. It can be used by the union member-designated beneficiary to attend any accredited college to pay for tuition, books, fees, room and board. In fact, the union member deliverable could be much more than $500 because of state tax benefits. In New York, it would be $500 plus the value of a tax deduction stretching up to $5,000. And there’s academic research that says saving even small amounts can have a big impact on college attendance; family savings of even modest amounts for college raises student expectations early on to prepare for and pursue a college education.
Regardless, the partner union would be helping and encouraging members to save for college instead of borrowing for it. The set-up is safe, FDIC-insured while with Amalgamated. It’s a better college financing vehicle for union member families than even federal student loans — compound, tax-free interest accrues to the member family instead of compound, after-tax payments piling up to the lender. It’s a platform for financial education, if the union wants to get into that. It’s a magnet for the contributions from others (think family birthday presents). And just to be clear, it would work for childless union members as well. There’s nothing that prevents an individual from opening a 529 account with him or herself designated as a beneficiary. So, one could think of and use a 529 account as a personal life long learning account.
The cons? It could take a little time to set up a partnership with a state 529 plan. Ohio took more than six months. Some folks can’t afford the $2 a week match or will bristle at having to choose Amalgamated as their 529 investment initially. Worse, after the requisite first year, they could shift their investment into risky securities and experience a loss in principal. But no one has to do this. It’s just a union member benefit idea.
Anyway, that’s our idea. Hat tip to Scott Frotman who got our staff starting to think about a variation of this long ago. “A College Fund for Every Union Member.” Why not?