President Obama rolled out a new initiative for “free” community college in his State of the Union Address, but in order to fund this program the administration has proposed taxing 529 college savings plans. In 2006, Obama voted to keep these plans permanently tax free, but now in 2015 the administration has described the 529 plan as “ineffective in serving its goals.”
In their current form, 529 plans allow families to save for their children’s education by putting after tax savings into a tax free account that collects interest. The account remains untaxed, so long as the savings are used to pay for college.
As Ryan Ellis and John Kartch of Americans for Tax Reform point out, college savings plans will now be subject to taxation under Obama’s new proposal:
“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.”
The people who use these accounts are largely middle class Americans. The Wall Street Journal quoted Ryan Ellis in an article on January 23:
“This idea that this is an account for the preserve of the Huxtables out there that make $250,000 a year is kind of ridiculous. Many owners of 529 plans are young parents who take pride in saving money in advance for their children’s college education. You’ve made them look like chumps for saving whatever they’ve saved so far.”
Perhaps the Obama Administration did not foresee a public outcry of such magnitude, but this proposal has been widely ill-received. Many are criticizing this proposed plan for what is really is, an attack on the middle class. It would deter middle class families from saving for college. In doing so, the Obama Administration is, yet again, making people more dependent on big government and less reliant on themselves.
Betty Lochner, head of the College Savings Plan Network, explains:
“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.”
State treasurers from Iowa, Kansas, Missouri, and Nebraska have all spoken out. Kansas Treasurer Ron Estes reasoned, “Why would you ever have 529s anymore? If I have to pay taxes on my earnings, why don’t I keep it in my own individual investment account?”
Joe Hurley, founder of SavingforCollege.com, described this idea as “anti-middle class for families trying to afford college.” Mark Kantrowitz, publisher of Edvisors.com went as far as to say, “‘this would eliminate all new investment in 529 plans.”
While the administration has referred to 529 plans as “inefficient”, this must not have been the case in 2007 when Obama and his wife invested $240,000 in 529 plans for their own daughters. President Obama’s family benefited from the 529 plan, but now he wants to take away the opportunity for other Americans to do the same.