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Editorial: Obama's bad idea to tax college savings plan

 
Published Jan. 30, 2015

The government should encourage parents to save for their children's college education, which is why President Barack Obama had no choice but to drop his ill-conceived plan to tax earnings from future contributions to so-called 529 plans. Only days after floating the idea, the president was forced to acknowledge he was sending the wrong message and bowed to withering bipartisan criticism.

The 529 plans were established years ago for families to hedge against the ever-escalating cost of college by allowing them to save early and let the money grow tax-free, using the power of time and compounding interest. The bar was set low. The Florida 529 Savings Plan, for example, requires only $250 to get started, or a recurring investment of $25.

The White House had argued that the majority of 529 plans are held by wealthier parents and that the taxes would have been used to help with low-income families' college costs. That may be true, but it misses the point.

More affluent parents have other tax-advantaged ways of saving for college, and the president's plan did not suggest any means-testing for the tax. That meant it would also have hurt the less wealthy families who are responsibly scrimping and saving to put away money for college.

In a survey, the College Savings Foundation, a nonprofit group that encourages families to save for college, found that the average 529 account held about $20,000 and that the average monthly contribution was about $175. It also determined that nearly 10 percent of 529 accounts are owned by households making less than $50,000. These are not exactly the statistics of the 1 percenters.

The Government Accountability Office estimates that roughly half of all families who have a 529 account make more than $150,000. But that means the other half do not. And with skyrocketing college costs today, even households with six-figure incomes cannot simply write checks to cover the cost. They all must save, and they should be encouraged to do so rather than penalized.