5 reasons we were outraged by the President's 529 proposal

http://www.savingforcollege.com/articles/5-reasons-we-were-outraged-by-the-president-s-529-proposal-720

The President’s proposal to take away the federal tax benefits of 529 plans caused a reaction that almost no one could have predicted. The day following his State of the Union Address every major publication featured a story on college savings plans. Republicans and Democrats alike opposed the plan, calling it an attack on the middle class. Much to our relief, the President had a change of heart and one week later he announced that he would leave 529 plans alone. The White House claimed that the reason for dropping the proposal was that it became “such a distraction”. But we wondered why they ever brought up this plan in the first place. According to Strategic Insight, there are over 7 million American families currently using 529 plans – that’s an awful lot of people to take tax benefits away from!

We took a closer look at the data used to support the President’s plan and wanted to provide some further clarification:

1. Times have changed

The idea to eliminate the tax benefits of 529 plans was based on the belief that very few families use them, and the ones who do are wealthy. Huh? We know that 529 plans have been gaining popularity in recent years among all income levels, so we checked the President’s source. “A Small Percentage of Families Save in 529 Plans” was a study conducted by the Government Accountability Office (GAO) in 2012 that cites data from 2010. So the first reason this plan was destined to fail was that it was based on five-year old data.

2. Not everyone saves for college

The study claimed that in 2010 only 3 percent of American families used 529 plans, yet 88 percent of 529 plans are owned by families with children. So why are we looking at the total number of households? According to data from Savingforcollege.com and the U.S. Census Bureau 6.8 percent of families with children were using 529 plans in 2010, and that number jumped 16.8 percent in 2014. So, yes, the more accurate number was close to six times the amount of people the proposal was based on.

3. We need to look at the bigger picture

The President’s proposal was based on the assumption that only a small number of wealthy families use 529 plans, and most had low account balances. The GAO report mentioned above cited a study of 6,432 families that found 3 percent had 529s, bringing the actual number to 195. In our opinion, that’s certainly not enough families to make up a sufficient sample size. Especially when you’re talking about a policy that would affect over 122 million households!

4. Wealthy families aren’t the only ones saving for college

In fact, according to Strategic Insight 70 percent of families that use 529 plans have household incomes below $150,000. And we believe this number is growing. In fact, Savingforcollege.com recently conducted a survey that revealed 73% of those people who intended to open a 529 plan in the next 12 months were below the $150,000 mark. While a north-of-six figure income might seem like a lot, it’s definitely nowhere near the one percent. In some major U.S. cities it could even be considered modest. Yet it’s still probably too much to qualify for any significant amount of federal financial aid, and too little to be able to pay for college out of pocket.

5. The tax incentive was working

Prior to the Bush tax cuts in 2001, earnings in 529 plans were taxed at withdrawal. Since they were made tax-free, the total amount of assets in 529 plans has skyrocketed, growing from $19.4 billion in 2001 to $254 billion today. At the end of 2013, the average 529 balance was around $19,000 – enough to cover about one-year’s worth of tuition and fees at a four-year public university today. We can safely assume that if the President were to take away the tax benefit this savings momentum would soon come to a halt. And if the removal of the tax benefits wasn’t enough, families would likely get hit with higher plan management fees. 529 plans have been growing rapidly in recent years, causing fees as a percentage of assets to decline. But if plan participation drops, fixed costs will make up a larger proportion of the fund’s total assets.

6. There was nothing to gain by the proposal

The President planned to use the tax revenue from 529 plan earnings to pay for other education reform programs such as free community college and making the American Opportunity Tax Credit permanent. But as we pointed out, if you take away the incentive families won’t use 529 plans. If no one is using 529 plans, there won’t be any tax revenue or college savings. The plan was a lose-lose situation for everyone involved.