On Tuesday, President Barack Obama decided to drop his proposal to tax the 529 college savings plans. The decision, which dominated more than a few headlines, came just a week after the president floated the idea as part of his plan to make college more affordable for low-income Americans.
Initially, the White House suggested taxing the plans, which are most commonly used by better-off Americans, to help expand tuition tax credits for the middle class. The proposal would have brought in about $1bn over the next 10 years. The White House might have misjudged their definition of middle class, seeing that the proposal met with opposition from both Republicans and Democrats.
The problem at the core of the debate was: who exactly were the Americans investing in 529 plans? Were they really better off as the White House assumed or were they also a part of the middle class?
“For a president who claims to support ‘middle class economics’, a policy like this makes no sense,” Corie Whalen Stephen, a national spokesperson for Generation Opportunity, told the Guardian, echoing the cries of a number of members of Congress. “The criticism that 529 plans only help affluent families is a smoke-and-mirrors argument made by those looking for an excuse to further the government’s role in controlling higher education policy.”
To prove her point, Whalen Stephen refers to College Savings Foundation that found that about 10% of Americans with 529 accounts have income below $50,000. Another 70% make below $150,000.
The truth is, it’s the small fraction of 529 holders with income over $200,000 that the White House was really interested in. The New York Times reported that according to the Obama administration, they reap about 70% of tax benefits because they can afford to put away as much as $14,000 a year without worrying about taxes.
One such 529 plan holder is Obama himself. According to his 2008 tax returns, the year before he was elected as the president of the United States, Obama and his wife invested $240,000 to save for Sasha’s and Malia’s college education.
Not everyone is able to save as much. According to the College Savings Foundation, in 2012 just 7% saved more than $100,000. Another 11% saved between $50,000 to $100,000. The majority of 529 owners saved less than $50,000.
Despite making regular contributions to his plan since he was a child, Wesley Coopersmith’s parents belong to that majority. The 23-year-old research assistant at Generation Opportunity grew up in a family with a household income nearing $50,000 a year.
“If the 529 savings were taxed, I would have had a lot less money to pay for college and may have had to go to a different college, or a community college,” says Coopersmith.
The savings from his 529 plan covered about 20% of his costs each semester while he attended Grove City College in Grove City, Pennsylvania, from 2009 to 2013. Tuition at his college is about $15,550 a year. Housing can add up to another $10,000. As a result, a four-year degree can come out to $100,000. The savings proved not to be enough for him to graduate debt-free.
“I still have about $45,000 of student loan debt I need to pay off,” says Coopersmith.
