The Obama Administration is set to propose a reduction of tax breaks for college savings accounts, 529 plans, in order to provide funding for his “free” community college initiative.
Back in 2006, Obama had promised to keep these programs tax free. The administration then decided in 2015 that the 529 plan was “ineffective in serving its goals.”
Currently, the 529 plan allows families to save for their child’s college education by placing after tax savings into a tax free account while collecting interest on the money. As long as the money is used to pay for college, the savings will remain tax free.
However, Obama’s new proposal would cause the savings plan to be subject to taxation. The majority of savings plan holders are middle class Americans, writes Dorothy Jetter for Americans for Tax Reform. Because low-income earners pay little to no federal income tax, the tax exemption would not be a help to them, and higher-income families already have savings accounts in place to ensure their children can attend college.
“Under Obama’s plan, earnings in “Section 529” (named for its location in the Internal Revenue Code) college savings plans will face full income taxation upon withdrawal. Under current law, earnings growth in 529 plans is tax-free if account distributions are used to pay for college tuition and fees. The Obama plan will tax earnings in these accounts even if they are used to pay for college tuition and fees,” writes Ryan Ellis and John Kartch of Americans for Tax Reform.
The proposal has been met with much criticism from those who believe it is an attack on the middle class by making it harder for those families to save for college, thereby making them more dependent on the government.
“What these accounts are designed for is the middle-income families that can’t afford to pay as you go and aren’t going to get need-based aid. It doesn’t make any sense to take away incentive to save,” says Betty Lochner, head of the College Savings Plan Network.
Joe Hurley, founder of SavingforCollege.com, said the idea was “anti-middle class for families trying to afford college.” While Mark Kantrowitz, publisher of Edvisors.com, added that it “would eliminate all new investment in 529 plans.” If the money put in was subject to taxation, many people would simply add to their own savings accounts rather than open a 529 plan.
Despite the White House referring to the plans as “inefficient,” The Obamas invested $240,000 of their own money into 529 plans for their two daughters in 2007, allowing the family to benefit from the plan.