After Heavy Criticism, Obama Drops Changes to 529 Plans

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After harsh criticism, President Obama has decided to reverse course on a proposal that would have cut the tax benefits of a popular college savings account.

White House officials said the criticism had reached a point that it became too much of a distraction, and the only thing they could do was to withdraw the proposal, which would have ended the ability of families to take money out of their college savings accounts, referred to as 529 plans, tax free.

The proposal had suggested that the plans were being used by the wealthy more than anyone else, and the suggestion of eliminating the tax break would in fact make more money available to middle class citizens, writes Danielle Douglas-Gabriel for The Washington Post.

However, this theory turned out to be untrue.  The accounts are in fact used, and relied on, by around 12 million families across the country.  In addition, an increasing number of people who earn less than six figures are opening accounts.

“The president’s plan has the puzzle pieces necessary to bring the middle class back, but this particular piece didn’t fit,” said Sen. Charles E. Schumer (D-N.Y.), who lobbied the White House to drop the plan.

In all, the proposal lasted about one week.  Critics were quick to jump on the plan, arguing that it did not help the average American saving money for the rising cost of higher education.

At first, the administration stood by the proposal, saying that 70% of account balances are held by those with incomes higher than $200,000.  However, officials quickly realized that the criticism the proposal was receiving was in fact hurting the rest of the plan the President proposed during his State of the Union Address.

“We’re not going to ask Congress to pass the 529 provision so that they can instead focus on delivering a larger package of education tax relief that has bipartisan support,” a White House official said Tuesday.

According to the College Savings Foundation, data from 2014 shows that 70% of account holders earned less than $150,000.  An additional 10% have earnings of less than $50,000.  The average family saves $175 per month and will hold a balance of $19,774 by the time the money is needed, reports Jonathan Weisman for The New York Times.

However, researchers for the Government Accountability Office disagree, finding that around 50% of families who hold accounts also earn more than $150,000 per year.

Overall, the administration is concerned with simplifying the amount of education tax credits out there.  In general, the president is looking to expand on the American Opportunity Tax Credit, which offers families as much as $2,500 each year for use on tuition, books and other college supplies.

“The 529 provision is a very small component of the president’s overall plan,” a White House official said Tuesday. “We proposed it because we thought it was a sensible approach, part of consolidating six programs to two and expanding and better targeting education tax relief for the middle class.”