The White House decided last Tuesday to drop the proposal to tax 529 college savings plans that President Barack Obama announced during his State of the Union address.

The provision had become “such a distraction,” that the Obama administration decided to drop it and focus instead on a larger package of “education tax relief that has bipartisan support,” a White House official said in a Jan. 27 USA Today article.

The elimination of the proposal came in response to the outcry by both Republicans and Democrats alike, according to the article. The official announced that Obama would not be asking Congress to pass the 529 provision as “the 529 provision is a very small component” of his plan.

The purpose of 529 college saving plans is to help families save for college costs and are usually operated by states or education programs. The withdrawal of the funds is tax-free as long as the money is used for educational purposes.

Some Syracuse University professors have used 529 plans to help fund their own children’s college educations. Donald Dutkowsky, an economics professor in the Maxwell School of Citizenship and Public Affairs, said he thinks the plans take pressure off colleges for financial aid as well as reduce student loans.

“It’s a great, successful program. The tax benefits are real and there is tax exemption if you use it for education. It can be misused, but I’ve done it myself and used the withdrawals for my daughter. It helped cover her expenses,” Dutkowsky said. “If we don’t have this, we should have other incentives. I’m glad to see it remain the way it is.”

While the plans may help families save money for their children’s education, Dutkowsky said he believes that a downside is that states lose tax money they could be collecting otherwise. He also said he thinks there are too many tax incentive programs to help families send kids to college and that they should be simplified.

Dutkowsky said he thinks the 529 plans serve as a “very important” tax break for families up to a $150,000–200,000 income level. Although he said he is in favor of the plans, he said he would consider putting a cap on the income bracket.

“It hits a nerve when there is any tax increase that the middle class experiences,” Dutkowsky said. “For almost any income status, it’s a large expense that all households feel. Just the idea of putting a tax on college education won’t win over Congress, and justifiably so.”

Syracuse University professor Carl Schramm said while he thinks the 529 plans simplify the tax code, he said he believes that ending the plans would “eliminate the upward pressure on tuition.”

“Government subsidies have generally been proven to push tuition upward,” Schramm said. “Eliminating (529 plans) would operate to keep prices down.”

Schramm said he thinks Obama did not understand the implications of his proposal and assumed that it would be widely embraced. He added that he thinks Democrats were concerned that middle class citizens would be upset.

In contrast to Obama’s reasoning behind the proposal, Schramm said he believes taxing the 529 plans would not shift revenue to lower-income earners.

“College costs have gone up and we’ve never related it to federal subsidy. It is easy to relax tuition when the government is willing to pay,” Schramm said. “One way is supplying generous student loans. This support actually burdens students in a way that has never burdened them before. There are less entrepreneurs because they bear a heavy debt-burden.”

Schramm said he thinks that there should not be tax incentives to save for college, as parents should “save and save.” He said he thinks that it should all be a part of the “simple mechanisms of financing.”

In the Feb. 3 story titled “Saving up: White House decides to drop proposal to tax student loan plans,” Carl Schramm’s view on the 529 plan was misstated. He said eliminating the 529 provision would simplify the tax code.

Published on February 3, 2015 at 12:01 am

Contact Katelyn: kmfaubel@syr.edu