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10 reasons why president obama's proposal to reduce 529 benefits will NOT be enacted
http://www.savingforcollege.com/articles/10-reasons-why-president-obama-s-proposal-to-reduce-529-benefits-will-not-be-enacted-714

Posted: 2015-01-21

by Chris Stack, Esq.

Financial Professional Content

In his January 20, 2015 State of the Union speech, which was expanded upon in the January 17, 2015 White House press release Fact Sheet, President Obama proposed a number of initiatives including streamlining education tax incentives. The Fact Sheet states: “Specifically, the President’s plan will roll back expanded tax cuts for 529 education savings plans that were enacted in 2001 for new contributions, and – like Chairman Camp’s tax reform plan – repeal tax incentives going forward for the much smaller Coverdell education savings program.” Such 2001 tax cuts for 529 consisted of tax-free withdrawals for qualified educational expenses.

Below are 10 reasons why I believe such specific proposal will not be enacted into law:

1. This is a new proposal, with no known prior support, in an attempt to finance another new proposal, free community college tuition, which has limited support in Congress.

2. To gain passage, the President must rely on the other party controlling both the U.S. Senate and House, with whom he enjoys little support, which he therefore must leverage to pass his higher priorities. In fact, largely because the President proposed this, the concept has been described as dead on arrival or “DOA”. The spokesperson for the Chairman of the U.S. Ways and Means is quoted in today’s Wall Street Journal as opposed to the idea.

3. The original 529 enabling legislation was co-sponsored in 1996 by two U.S. Senators, one of whom is the current Senate Majority Leader, Sen. Mitch McConnell. It seems unlikely he will oversee the repeal of a key benefit or most any part of a program he largely created.

4. Since 529 was enacted, there have been about a half-dozen amendments – all passed by bi-partisan support and all making 529 tax treatment better. The bill that proposed tax-free withdrawals enjoyed more than two thirds of both houses as co-sponsors. In fact, there is legislation currently pending in the new Congress to further expand benefits for 529.

5. With less than $250 billion in assets under management for both pre-paid tuition and investment 529 plans, there is little revenue to be gained to the U.S. Treasury by reverting back to taxation of qualified withdrawals at the students’ rate, which is often the lowest possible rate. Such treatment would not be sufficient to pay a significant cost of free community college tuition.

6. 529 plans are maintained by states and their public officials who enjoy a unique relationship with their D.C. representatives, on both sides of the aisle. The current head of the 529 industry group for all the states, College Savings Plan Network, who also runs the popular State of Washington pre-paid tuition plan has already publicly opposed “this proposal as it will negatively impact American families and their ability to save for higher education.” Based on precedent, it is widely expected that every state 529 official in the 49 states offering a 529 plan will strongly voice their objections to their fellow elected officials representing them in D.C.

7. Most states are enjoying some level of revenue share from the 529 Assets Under Management. Thus, there is an economic incentive for states to resist any attempt to reduce the appeal and therefore the growth and utilization of 529 plans.

8. The current student debt levels are at a crisis level with over $1.3 trillion currently outstanding and delinquencies climbing. Any attempts to cut back programs designed to save, rather than borrow, are not supported by good public policy.

9. 529 programs enjoy good popularity with more than 12 million 529 accounts currently in place. They continue to grow and the constituency widens. Many individual voters would oppose any proposal to remove such an initiative.

10. There is nothing else available to the middle class to assist them in preparing for future college costs. Every other higher education tax incentive has some type of income limit. Further, the states have ensured, through a variety of policies and programs, the participation of lower income class families to a wide degree. The NY 529 investment plan, as one example, allows any person to participate for as little as $25 for a total cost of 16 basis points. One could not otherwise access Vanguard Funds (used in the NY 529 plan) for less than $3,000 or at such a low all-in cost.

Download this article as a printable PDF

The above position does not represent the views of Saving For College, LLC (SFC) nor do they represent the views of any client of SFC or affiliate thereof. The views expressed are subject to change without any prior notice.

Financial Professional Content

In his January 20, 2015 State of the Union speech, which was expanded upon in the January 17, 2015 White House press release Fact Sheet, President Obama proposed a number of initiatives including streamlining education tax incentives. The Fact Sheet states: “Specifically, the President’s plan will roll back expanded tax cuts for 529 education savings plans that were enacted in 2001 for new contributions, and – like Chairman Camp’s tax reform plan – repeal tax incentives going forward for the much smaller Coverdell education savings program.” Such 2001 tax cuts for 529 consisted of tax-free withdrawals for qualified educational expenses.

Below are 10 reasons why I believe such specific proposal will not be enacted into law:

1. This is a new proposal, with no known prior support, in an attempt to finance another new proposal, free community college tuition, which has limited support in Congress.

2. To gain passage, the President must rely on the other party controlling both the U.S. Senate and House, with whom he enjoys little support, which he therefore must leverage to pass his higher priorities. In fact, largely because the President proposed this, the concept has been described as dead on arrival or “DOA”. The spokesperson for the Chairman of the U.S. Ways and Means is quoted in today’s Wall Street Journal as opposed to the idea.

3. The original 529 enabling legislation was co-sponsored in 1996 by two U.S. Senators, one of whom is the current Senate Majority Leader, Sen. Mitch McConnell. It seems unlikely he will oversee the repeal of a key benefit or most any part of a program he largely created.

4. Since 529 was enacted, there have been about a half-dozen amendments – all passed by bi-partisan support and all making 529 tax treatment better. The bill that proposed tax-free withdrawals enjoyed more than two thirds of both houses as co-sponsors. In fact, there is legislation currently pending in the new Congress to further expand benefits for 529.

5. With less than $250 billion in assets under management for both pre-paid tuition and investment 529 plans, there is little revenue to be gained to the U.S. Treasury by reverting back to taxation of qualified withdrawals at the students’ rate, which is often the lowest possible rate. Such treatment would not be sufficient to pay a significant cost of free community college tuition.

6. 529 plans are maintained by states and their public officials who enjoy a unique relationship with their D.C. representatives, on both sides of the aisle. The current head of the 529 industry group for all the states, College Savings Plan Network, who also runs the popular State of Washington pre-paid tuition plan has already publicly opposed “this proposal as it will negatively impact American families and their ability to save for higher education.” Based on precedent, it is widely expected that every state 529 official in the 49 states offering a 529 plan will strongly voice their objections to their fellow elected officials representing them in D.C.

7. Most states are enjoying some level of revenue share from the 529 Assets Under Management. Thus, there is an economic incentive for states to resist any attempt to reduce the appeal and therefore the growth and utilization of 529 plans.

8. The current student debt levels are at a crisis level with over $1.3 trillion currently outstanding and delinquencies climbing. Any attempts to cut back programs designed to save, rather than borrow, are not supported by good public policy.

9. 529 programs enjoy good popularity with more than 12 million 529 accounts currently in place. They continue to grow and the constituency widens. Many individual voters would oppose any proposal to remove such an initiative.

10. There is nothing else available to the middle class to assist them in preparing for future college costs. Every other higher education tax incentive has some type of income limit. Further, the states have ensured, through a variety of policies and programs, the participation of lower income class families to a wide degree. The NY 529 investment plan, as one example, allows any person to participate for as little as $25 for a total cost of 16 basis points. One could not otherwise access Vanguard Funds (used in the NY 529 plan) for less than $3,000 or at such a low all-in cost.

Download this article as a printable PDF

The above position does not represent the views of Saving For College, LLC (SFC) nor do they represent the views of any client of SFC or affiliate thereof. The views expressed are subject to change without any prior notice.

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