Critics say Obama proposal will hurt families saving for college

About 12 million people across the U.S. have money socked away, in most cases by their parents, in special savings accounts meant to be used to pay for college.

The draw of the plans, known as 529 plans, is that when the money is withdrawn to pay for expenses like tuition, fees, books and some room and board costs, the interest earned by parents’ deposits is not taxed.

If the tax reform package President Obama proposed during his State of the Union address this week were to become law, that federal tax benefit would disappear for any future contributions to 529 accounts.

Obama’s proposed changes to these savings plans are part of a streamlining of education tax credits the White House says will ultimately benefit middle-class families.

Sandy Baum, an expert on college costs at the Urban Institute, told the New York Times that 529 plans “primarily provide a subsidy to people who would save in other forms anyway.” Meaning, the accounts are used by affluent families with extra disposable income, not the middle-class parents proponents say use the accounts.

A story in the Wall Street Journal points to a report from the Government Accountability Office showing more than half of families contributing to the plans earn less than $150,000 a year and 30 percent earn less than $100,000, putting them in a position where paying for one or more child to go to college could be unaffordable without prior savings.

“We’re unlikely to find out how changing the taxes applied to the college savings plans would play out for American families,” Sen. Lamar Alexander, R-Tennessee, chair of the Senate’s education committee, told the Wall Street Journal the 529 plan is “sure to go nowhere in Congress.”

PBS NewsHour coverage of higher education is supported by the Lumina Foundation and American Graduate: Let’s Make it Happen, a public media initiative made possible by the Corporation for Public Broadcasting.