President Obama pushes tax on college savings plans

  • The College Savings Foundation found last year that 70 percent of 529 plans are held by households with incomes below $150K.
  • The Obama's are funding their daughters' education through a 529 plan.

After recent promises to simplify the tax code and assist the middle class, President Obama is now pushing a tax increase on many families that earn less than $150,000 annually.

Currently, those who participate in a 529 college savings plan can withdraw their children's college nest egg without facing a tax, an incentive that has boosted enrollment in the state run savings programs.

"Middle income families that have worked hard and saved to send their children to college should receive our support, not a new tax bill to pay for his agenda."   

The popular 529 section of the tax code is designed to help families save for future college costs and functions in a manner similar to an IRA account, a perk that has not gone unnoticed within the Obama household (the Obama's are paying for their daughters' college education through 529 accounts).

However, the plan is most commonly taken advantage of by middle-income families. The College Savings Foundation found that in 2014, 70 percent of 529 plans were held by households with incomes below $150,000.

In an ambitious effort to overhaul many aspects of education in America, the White House wants to tax withdrawals from 529 college savings plans. This revision to the wildly successful program, which analysts estimate holds over $217 billion for roughly seven million families, has some experts predicting a significant divestment from college savings plans.

President Obama’s proposal would also unite all education tax breaks into the American Opportunity Tax Credit—using it as a funnel to later direct all federal assistance.

Rep. Lynn Jenkins (R-Kan.) has come out against the president’s plan, pointing to the current success of the 529 tax-free savings plans.

In the Republican Leadership Press Conference following the State of the Union address, Jenkins noted that once college savings withdrawals became tax-free in 2001, account holders grew from one to 12 million.

According to Forbes, in the first year of the tax law change, from 2001 to 2002, assets in 529 plans expanded from $13 billion to $26 billion and the program saw an increase of more than two million accounts, a near doubling in plan participation.

Jenkins is expected to unveil her own proposal in response to President Obama’s plan. She would instead expand the scope of 529 plans to include computers as an educational expense able to be purchased with the savings.

“I know few students trying to get a degree that don’t need access to a computer,” Jenkins said in her reaction to Obama’s State of the Union. “It’s a very expensive part of heading off to college.”

Jenkins believes that a reversal in the current tax-free status of the plan would disincentivize saving and hurt middle-income families.

“Now President Obama wishes to turn back the clock and further burden hard working families with new taxes," Rep. Jenkins said. "Middle income families that have worked hard and saved to send their children to college should receive our support, not a new tax bill to pay for his agenda."

She later added that it would “remove the incentive for families to provide for themselves.”

Follow the author of this article on Twitter: @LaurenLouClark



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Lauren Clark
Lauren Clark | Reporter at KBOI Idaho News

Lauren Clark is a Reporter at KBOI Idaho News. Prior to joining the KBOI team, Lauren was an Arizona Campus Correspondent for Campus Reform. 

20 Articles by Lauren Clark