NCPA - National Center for Policy Analysis

Obama's Plan to Raise Taxes on College Savings

January 26, 2015

How does President Obama plan to make college more affordable? By ending tax breaks on college savings plans.

College savings plans, known as 529 plans, allow parents to deposit money into savings accounts that grow in value over time. When those dollars are withdrawn to pay for higher education expenses, the earnings aren't taxed (though if they're withdrawn for non-education expenses, they are subject to tax).

Kara Brandeisky at reports that the president wants to end that tax advantage in order to use the additional revenue to pay for an education tax credit for lower-income families. He's raising taxes on families saving for college in order to reduce taxes on less wealthy families.

Are 529 plans only for upper-income households? Not at all. In fact, Americans for Tax Reform cites numbers from the College Savings Foundation concluding that 70 percent of families with 529 plans have incomes below $150,000 and notes that the average 529 account has a balance of less than $21,000.

Moreover, according to Brandeisky, there are a couple of reasons that low-income households aren't using the accounts as much. First, she says households with relatively higher incomes tend to use the savings accounts more than low-income households simply because they're subject to higher taxes. Lower income families, she says, aren't paying as much in taxes, so they're not as likely to be lured by the tax incentives of a 529.

Additionally, many families simply aren't aware of the accounts: According to a report from student loan corporation Sallie Mae, 49 percent of parents who plan to send their children to college do not know what a 529 plan is.

Source: Kara Brandeisky, "Why Obama Wants to Tax College Savings,", January 22, 2015.


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