Monthly top tips

529 E-ditorials

00-18: Gore vs Bush on saving for college
Joe Hurley
Sunday, September 10th 2000

I would never be so bold as to suggest which presidential candidate you should vote for (at least not until we get to know each other better). In fact, I’m one of those people registered in one political party who more often than not votes for the candidates in the other parties. But I am interested in the politics of higher education, and that particular topic happens to be one of the major campaign themes coming from both the Gore and Bush camps in this election year.

I’m encouraged by what I am hearing. The importance of higher education is clearly evident in the rhetoric, and substantive proposals are being advanced to help families of all income levels save and pay for college. Here’s where things stand on the candidates positions vis-à-vis 529 plans, from what we can gather.

George W. Bush wants to see earnings in a 529 plan made tax-exempt, not just tax-deferred. Of course, that’s what we would really like to see as well. It just seems to make sense: if the inflation in the value of your home can escape tax when you sell it, the inflation in the value of your college savings account should escape tax when you use it for college expenses. Yes, it’s nice that current law pushes the income into the student’s tax bracket, but there’s still a tax to pay (and if the tax money comes from the 529 account then there’s a penalty to pay as well).

Twice in recent years we have seen bills exempting 529 earnings from tax pass the GOP-controlled Congress only to be vetoed by President Clinton. So it’s certainly no surprise that George W. says he will sign that piece of legislation when he becomes President (a similar bill was passed by the Senate again this year but is now stalled in the House). Also contained in the legislation are provisions allowing private institutions to have their own 529 prepaid tuition plans, which would make the landsCape even more interesting.

Governor Bush also likes the idea of increasing the amount that can be contributed to education IRAs from the paltry $500 annual limit we now face to something closer to $5,000. This would also be good for middle-income savers (there’s an income Cap), although it would create significant new competition for the state 529 plans.

Al Gore also came out in support of tax-free treatment for 529 plans when he began campaigning earlier this year. But now we don’t hear him emphasizing the tax break, perhaps because his boss (the one who vetoed the prior bills) has reiterated his opposition to the GOP 529 bill in Congress in favor of a new school construction bond program that gives federal tax credits to bond purchasers.

However, the 529 tax-exemption still appears to be part of the Vice-President’s proposal for a National Tuition Savings Program. That’s comforting, although I really think he should jettison the whole idea. This proposed program, providing a kind of federal tuition insurance layered on top of the state 529 plans, seemed unworkable when we first commented on it back in February (see 529 E-ditorial 00-5 “What’s Al Proposing?”), and it still seems unworkable now. If we don’t understand it, who else will?

Besides NTS, Mr. Gore is suggesting adoption of the Clinton administration’s College Opportunity Tax Cut proposal, which reworks the Lifetime Learning credit as a deduction of up to $10,000 per year of college costs or a tax credit of up to $2,800. That would be helpful to families who fit within the qualifying income range and incur significant college costs (families at low cost community colleges may not see much benefit, however).

And finally, there are the Gore proposals encouraging employers to provide education benefits to employees. One way to do this would be to make permanent the tax exclusion for employer-provided education assistance and to extend the benefit to family members of the employee. A second way would be with employer-sponsored “401(j)” accounts that do for education what 401(k) accounts do for retirement.

Gore or Bush – you decide. Seems to me they are both intent on making college more affordable, and that is good news.

» 05-4: The 529 marshals have arrived - 08/30/05
» Our 5.29th-year anniversary - 06/29/05
» 05-2: 529s and the new Bankruptcy Act - 04/28/05
» 05-1: Reform or Deform? - 02/27/05
» 04-6: Perspectives on the 529 debate - 12/28/04
» Show All Archives