Obama Cries Uncle on Changing 529 College Savings Plans

Obama Nixes 529 Tax Plan After Facing Bipartisan Criticism

Facing angry parents and opposition from Republicans and Democrats as well as Wall Street, President Obama backed away from a controversial proposal to end a tax break on future use of 529 college savings plans, the New York Times reported.

The decision came just hours after Speaker of the House John Boehner of Ohio demanded the idea be withdrawn from the budget. Leading House Democrats -- such as Nancy Pelosi of California and Chris Van Hollen, a Maryland representative who is the ranking minority member of the Budget Committee -- had also pressed the administration to alter its intent.

As DailyFinance has reported, 529 plans are investment accounts in which people deposit after-tax funds. Interest paid helps the total grow and the gains are tax free on withdrawal so long as they're spent toward qualified educational expenses. All 50 states and the District of Columbia have such plans, according to NPR.

For the Elite?

Such plans can be an effective tool for college expenses, but the White House claimed that they were effectively a tax break for the wealthy. The administration has argued that less than 3 percent of families made use of 529s, and 70 percent earned more than $200,000 a year. As the Times wrote, 80 percent of the families make more than $150,000 a year. Those levels are considered as significantly above middle class, according to economists.

Obama wanted to take the estimated $1 billion cost of lost federal government revenue from the 529 plans and put the money into the American Opportunity Tax Credit, a tuition tax credit designed more for middle class families, by making it permanent, reported U.S. News and World Report.

Even if the White House was correct in its analysis, the move was too easily spun into an attack on a plan that could help the middle class, an argument that Republicans made. Boehner said that "529 plans help middle-class families save for college, but now the president wants to tax those plans."

In addition to angering affluent families that used the programs, the administration raised the ire of states that run the plans and Wall Street, which helps administer plans and makes money from them.

The controversy came only days after the State of the Union address, in which Obama laid out a series of proposals he claimed would help middle class families in a variety of areas, including higher education. For example, one of his ideas was to fund free community college education for all who would maintain their grades and graduate on time.
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