Many investment professionals were surprised last week by the Obama administration’s fiscal 2014 budget proposal to place a cap on balances in tax-advantaged retirement accounts.

On top of that was the idea to re-install (beginning in 2018) the 2009 estate tax exemption of $3.5 million and maximum estate tax rate of 45 percent. This comes after having just enacted a law that gave us a “permanent” $5 million exemption and lower estate tax rates.

Such proposals might raise in your mind the question of what will happen with 529 plans in the future. Will Congress or the President attempt to pare the federal tax benefits of 529 plans, or restrict access to them?

The answer, in my mind, is “no.” Here are 10 reasons why President Obama won’t touch your 529 plan.

1. 529 plans have a good track record.

Simply put, they work. Many families that previously opened 529 accounts are now tapping them to pay for college. (According to the College Savings Plans Network, 1.34 million accounts took distributions in 2012.) Money that would otherwise go to Uncle Sam in the form of taxes on investment earnings is being used to purchase higher education, fulfilling the original promise of 529 plans. Distribution requests are being processed timely; tax reporting is being done correctly; and families are generally pleased with their decisions to use 529 plans. The plans themselves have improved greatly over the years: expenses have been dramatically lowered, investment choices have broadened, and disclosures have improved. And unlike IRAs and defined contribution retirement accounts, 529 plans already have caps on contributions. What’s not to like?

2. 529 plans are popular

Over 11 million accounts existed at the end of last year, spread among almost six million families. A 2012 survey by the College Savings Foundation found that 30 percent of families whose children are college-bound reported having a 529 account. Perhaps CSF should add a new question added to future surveys: Do you plan to vote in the next election? I am guessing most 529 account owners are likely voters—not that anyone going up for election ever takes that into consideration.

3. 529 plans are helping middle-class working families

The financial struggle of middle-class Americans has been a focus of the Obama administration, and nowhere is that struggle more pronounced than with families affording college when they do not qualify for Pell grants or other programs reserved for the lowest incomes. The Treasury Department said as much in a 2009 report to Vice President Biden’s White House Task Force on Middle Class Working Families. Treasury Secretary Geithner also gave a specific shout-out for 529 plans, stating during a forum at Syracuse University that they can be an “immensely effective way for Americans to save for college.”

4. 529 plans don’t cost the government very much

The staff of the Joint Committee on Taxation pegs the 2013 federal tax expenditure for 529 plans (both prepaid and savings) at less than $1 billion. Compare that figure to the $20 billion price tag on federal tax credits for higher education. IRAs represent a tax expenditure in 2013 of more than $15 billion, while defined contribution plans will cost the government $57 billion this year. It’s little wonder that President Obama is looking to place new restrictions on retirement plans—that’s where the budget money is.

5. College prices are out of control

According to the College Board, the published price of tuition at private colleges rose 4.2 percent for the 2012-13 academic year, and at public universities the increase was 4.8 percent. (The consumer price index rose only 1.7 percent in 2012.) In the 30 years between 1979 and 2009, family incomes rose 10 percent, while private college tuition rose 154 percent and public university tuition rose 186 percent. The federal government can do little to stop this tuition spiral, but what it can do is provide all American families at every income level with a tax incentive to save as much as they can towards college.

6. Student debt is out of control

Simple math: Net cost of college, minus savings or income to pay that cost, equals education loans.

Students now graduate from college with an average of more than $27,000 in student loans, placing a significant burden on them as they try to establish their adult lives. Total student debt in America is believed to have crossed $1 trillion, surpassing credit card debt. Some argue the federal government makes it too easy to obtain student loans, resulting in distressingly-high default rates. The word “savings” in the above equation is bolded to emphasize that an increase in 529 account balances will lead directly to a reduction in student debt. President Obama and most of our elected representatives in Washington understand simple math.

7. America needs more college graduates

The President recognizes the need for a highly-skilled and educated workforce and the risks to this country’s future economy and security if families decide they cannot afford to send their children to college. He has set a goal that by 2020, America should once again lead the world in the proportion of adults with a college degree. 529 plans lead to increased college enrollment. Studies from the Center for Social Development at Washington University in St. Louis found that children with dedicated college savings accounts are six times more likely to attend college than children with no college savings.

8. The states have a vested interest in 529 plans

The states invented 529 plans and they remain heavily committed to them. State treasurers won’t have much to say if the Obama administration looks to balance the budget through changes to tax-advantaged retirement plans, but they will raise heck if anyone suggests a change that threatens to undermine their 529 plans. I can’t say the state 529 lobby is anywhere near as strong as the retirement industry lobby, but as public officials they should carry some weight in Washington. After all, many Congressional representatives have state government on their resumes.

9. Congress has 529s

Some day, when I have nothing else to do, I would like to take a look at the financial disclosure statements of elected representatives in Washington to determine how many appear to be using 529 plans for their children and grandchildren. I suspect there are a considerable number. Any proposal to cut the benefits or restrict access to 529s will directly impact their own ability to afford college. We’ve come a long way since the Congressional hearings in 2004 when a couple of committee members kept referring to “592” plans.

10. The President has 529s

First Families are not immune to the challenge of paying for college. Malia Obama will be 15 years old this year, and Sasha will turn 12. Their parents made very large contributions to 529 plans back in 2007. Just saying.

I’ve just returned from the College Savings Foundation’s annual 529 conference, held this year in Scottsdale, Arizona. While many different topics were covered during the two days of the conference, most of the buzz related to a report recently issued by the Government Accountability Office (GAO) to the Chairman of the U.S. Senate Finance Committee.

The report’s title “A Small Percentage of Families Save in 529 Plans” suggests that 529 plans are not doing all that much to help solve the college affordability crisis in this country. To back up this conclusion, the GAO cites statistics indicating that, according to the 2010 Survey of Consumer Finances, less than 3 percent of families saved in a 529 plan or Coverdell Education Savings Account.

The GAO figure rises to 6 percent if it includes only the families that had children under 25 living with them.

But a separate report from Financial Research Corporation (FRC), which supplies data to the College Savings Foundation, finds that 15 percent of all households with children under the age of 18 are using 529 plans. This is presented as encouraging news.

So whom to believe?

My own conclusion is that the precise percentage doesn’t really matter all that much and can likely be explained by different numerators, denominators, data sources, and time periods. But what does matter is whether or not 529 plans are helping American families in a significant way.

I offer my own statistical approach to suggest that 529 plans are contributing in a most impressive way.

The Chronicle of Higher Education estimates there will be 2,912,480 new public high school graduates for 2012-13. The U.S. Census Bureau finds that about 68.1% of high schoolers immediately enroll in college following graduation. This means we can expect to see 1,983,400 public high school graduates heading to college next year.

The College Savings Plans Network (CSPN) says there are approximately 11 million 529 accounts in existence. Simple division suggests that 529 plans have been established for the equivalent of more than 5 graduating classes of college-bound students.

Of course, my analysis should be adjusted for multiple 529 accounts (more than one account for the same child), for 529 accounts held for individuals past high school age, and for private high school students not counted by the Chronicle of Higher Education. But throwing in a few rough-number adjustments still shows 529 accounts having been established for the equivalent of more than 4 graduating classes.

In my mind, this is fairly awesome.

photo credit: Charline Tetiyevsky

I recently sold Savingforcollege.com to College Savings Holdings, LLC, which also owns GradSave. GradSave (www.gradsave.com) is a college savings registry--the country's largest--that provides a service allowing friends and family to make gifts into a child's 529 college savings account.

One thing I like about the GradSave "crowdfunding" concept is that if you use the service, it is NOT because of the tax benefits associated with 529 plans, but simply because you want to help a friend or relative afford college for their child. It is a way, that might not otherwise be possible, for families of every income level to use 529 plans in building their college savings. This is especially relevant in the face of recent headlines screaming that 529 plans are being used primarily by the wealthy.

So of course I wanted to try GradSave for our own Christmas gifting. And the best validation of the service comes from these notes my wife and I received from our two young nieces Reilly (age 9) and Harley (age 6, who refers to "colig muny"). Try it yourself.

President Obama has just signed the 2012 American Taxpayer Relief Act (ATRA), restoring many of the education tax incentives slated to expire on December 31, 2012, and even resuscitating incentives that had expired at the end of 2011. Here are some frequently asked questions concerning the new law (feel free to email jhurley@savingforcollege.com if you have other questions):

Has the Coverdell education savings account been saved?

Yes. While not exactly going down the fiscal cliff in flames, the ESA would have been severely gutted if returned to its pre-2002 tax status. All of the beneficial changes made with the 2001 Tax Act are now permanent. These include the tax-free use of an ESA for K through 12 expenses; the $2,000 annual contribution limit (it was $500 before 2002); the coordinated use of tax-free ESA distributions in the same year an education tax credit (see below) is claimed; and allowing contributions to both an ESA and to a 529 plan for the same beneficiary in the same year.

So if you are partial to the self-directed nature of Coverdell ESA investments, or are planning to spend money for private grade school, you should be pleased.

Has the 529 plan been saved?

No. It did not need saving. The provisions of Section 529 were already permanent, thanks to the 2006 Pension Protection Act. However, it would be nice if legislation comes along in the future to include computers as qualified expenses for every college student, and to expand the number of investment changes in a 529 account.

The tax-deferral and tax-exclusion benefits of 529 plans actually increase for taxpayers with taxable incomes above $400,000 (married couples above $450,000) thanks to new higher income-tax and capital-gains brackets, not to mention the new 3.8% Medicare tax on investment income for high earners.

Won’t the high estate tax exemptions reduce the appeal of 529 plans?

I suppose it might, figuring that fewer American families are exposed to the federal estate tax as a result of the now-permanent $5 million (adjusted for inflation) estate and gift tax lifetime exemption. Fewer individuals will have a burning desire to reduce their estates, and who are interested in 529 plans as the only vehicle accommodating a transfer of wealth without transferring control.

On the other hand, we should see much larger contributions going into 529 plans as a direct result of the $5 million ($10 million for a couple) estate exemption. There will be less reluctance in making contributions that exceed the $14,000 gift tax annual exclusion when the consequence of doing so is to simply eat into a lifetime exemption that will never be fully utilized.

And don’t forget about state-level inheritance and estate tax. Many states have exemptions well below the $5 million level, and shifting wealth via a 529 plan can still make a big different in tax exposure without giving up control.

What is happening with the education tax credits?

The very generous American Opportunity tax credit has been extended for five years, through 2017. After that, we return to the somewhat less-generous Hope credit. You should be doing everything you can to take maximum advantage of the American Opportunity tax credit because you really cannot beat it. This includes in some cases shifting the credit to the student—along with some income—when the parents exceed the income threshold. Notably, ATRA brings back the phase-out of personal exemptions for high earners, which makes shifting the credit to the student a no-brainer for many high-income families.

The Lifetime Learning credit was not at risk of expiring. We are still awaiting 2013 inflation-adjusted income threshold numbers from the IRS.

How about the above-the-line deduction for tuition and fees?

The tuition and fees deduction has been extended retroactively from the end of 2011 to the end of this year 2013. For the life of me, I cannot understand why. With a maximum deduction of $4,000, the American Opportunity tax credit is almost always a better deal, and you cannot do both.

What else has been extended or made permanent by ATRA?

Section 127 employer-provided educational assistance is now permanent. So is the expanded deduction for student loan interest.

Dun & Bradstreet Credibility Corp., a 600-person company headquartered in California, announced this week that it had become the "first" employer to establish a program that matches employee contributions to a 529 plan while also making cash donations to specified local school districts.

DBCC has set up a website at EdAhead.com that explains the program to its employees and encourages other employers to adopt its model.

The company match is dollar-for-dollar up to $2,500 annually ($1,000 for hourly workers) and the only real string attached to it is the requirement that employees wishing to make contributions eligible for the match establish their accounts with Nevada's Putnam 529 for America program.

Because the employer match amounts are subject to all income and payroll taxes, DBCC is also giving its participating employees a "gross-up" amount to cover the extra taxes.

This is certainly a bold move for any company to make. Employees would have to be out of their minds not to participate, even if they had no children or grandchildren. (You can set up a 529 account for yourself as beneficiary.) If the employee did not have $2,500 to contribute, he or she should go out and borrow the money.

Let's see: If we assume a grossed-up cost to DBCC of $3,500 per full-time employee--and that is probably on the light side--and multiply that figure by 600 employees, it comes to a $2.1 million annual expense, not including the amount donated to school districts.

Wow! Even if a large percentage of employees are hourly, which reduces the outlay accordingly, it is still a very impressive commitment to helping employees save for college.

It would be great if other employers followed suit. But it's not apparent that will be the case. I have written about employer contributions to employee 529 accounts many times in the past (see the second Q&A here for example), and there are some tricky issues to consider.

(Oh by the way, DBCC claiming to be the trailblazer here is a bit misleading, because they also include the school district piece to their plan. If your company were to match employee contributions and at the same time promise banana cream pies to the local food shelter, I can guarantee you would be the first to do that.)

One problem is the enormous cost of the tax gross-up on top of the basic benefit. Another is the fact that employees can do anything they want with their 529 plan, such as using it for a down payment on their vacation condo. Yes, there is a tax and penalty on non-qualified withdrawals, but only on the earnings in the account. If the employer puts in money today, and the employee takes a withdrawal from the 529 plan tomorrow, there won't be any earnings to speak of.

A third potential problem might come from the employees themselves, perhaps a certain amount of disgruntlement if the 529 matching program is perceived as a substitute for cash bonuses.

Employer 529 funding might get around some of these issues if established as part of a deferred compensation plan, where the company owns the 529 accounts and employees risk forfeiture of the benefits under certain conditions. But deferred comp is beastly to deal with from a tax and regulatory standpoint, and most employers would not want to consider that option.

So if other employers do want to follow the DBCC model, I have one suggestion to make: apply the match only to amounts contributed by employees through automatic monthly contributions, and not lump-sum contributions. Automatic contributions signify greater ongoing commitment to college savings and makes it more likely the employer funds will be used for the intended purpose. Also, tell employees that their matching contributions will end if they at any time make a non-qualified withdrawal from the 529 plan.

I was very interested to see the "grass-roots" lobbying website SaveMy401k.com launched this week by the American Society of Pension Professionals and Actuaries (ASPPA).  The 401k industry apparently feels threatened by the prospect of far-reaching tax reform in Washington, and wants to be sure that Congress hears from many of the 60 million or so participants in 401k plans as to how important it is to "protect my piggy."

The 529 industry has no such grass-roots effort going. Should it? After all, there are more than 10 million American families using 529 plans, with total investments approaching $300 billion.  And as we all know, college ain't getting any cheaper.

I defer to one of the esteemed speakers at our recent 529 Annual Conference  in addressing the question of whether the 529 industry should be concerned about tax reform. Jamey Delaplane, chief of government relations at Vanguard, told the assembled group the answer is "Yes," mostly because EVERYTHING will be on the table for discussion in Washington, including 529 plans. Jamey also mentioned  mounting concerns in Congress about high-income families receiving a disproportionate amount of the tax benefits associated with 529 plans.

At the same time, 529 plans are not as exposed as the 401k industry purports to be. The revenue-loss figures associated with tax-free 529 accounts, while substantial and growing, are still well below the figures associated with retirement plans. Most importantly, the need for an educated workforce, the costs of obtaining a college degree, and the college debt crisis create a real need for 529 plans in attacking these issues.

And not for nothing, quite a few representatives in Congress, along with President Obama, are worried about college for their own kids and have accounts with 529 plans.

Pushing the panic button the way ASPPA seems to be doing it might well be counterproductive. It could drive more families to steer clear of 529 plans, thinking that something bad might happen to their investments as a consequence of tax reform.

Of course, even if the 529 industry wanted to stir up a grass-roots campaign it would be difficult to do so. We just are not as well organized as the pension industry. (ASPPA was founded in 1966 and has more than 10,000 professionals as members.)

The College Savings Foundation does a remarkably good job in lobbying Congress on behalf of the 529 industry and  for the benefit of American families using 529 plans. But there are fewer than three dozen members in CSF, including Savingforcollege.com.

The states also have an active and ongoing discussion with Congress through the College Savings Plans Network. But not being a member of that group, I have less familiarity with its activities.

However, if Congress ever comes out with a proposal to severely limit the benefits of 529 plans, the grass-roots gloves come off. But rather than "protect my piggy" the mantra will be "protect the future of this country."

Quiz question: What do District of Columbia, Louisiana, Rhode Island, South Carolina, South Dakota, Rhode Island, and West Virginia all have in common?

Answer: Each offers a direct-sold 529 plan that restricts participation to its own state residents. As a general rule, nonresidents "need not apply" to any of these plans.

What's more, in 3 of these 7 states, the plan is essentially FREE. That's right: the plan charges absolutely NO program management or administrative fees to its participants. The only costs in the plan are indirect costs, namely the expenses of the underlying mutual funds used by the plan.

Those three states are Louisiana, South Carolina, and South Dakota. (Some but not all of the investment options in Rhode Island are similarly free of added expenses.)

Louisiana, South Carolina, and Rhode Island also drive down indirect expenses by utilizing index funds, thereby earning distinction for having investment options with the lowest overall costs among all 529 plans. That's according to Savingforcollege.com's most recent Fee Study (updated as of October 15, 2012).

South Carolina is the latest state to go the no-cost route and they have done it in a stunning manner. See my prior blog post for more about South Carolina.

So to everyone reading this blog, take note: This will be THE NEXT BIG THING in 529 plans!

There will be a trend to resident-restricted 529 plans, and it will occur mostly among smaller states and in states that do not or cannot offer a state tax deduction for contributions.

Let's face it, many of these states are no longer able to offer a direct-sold 529 plan that can compete with the big plans on price, and currently would be doing their residents a favor by suggesting they look elsewhere with their college savings money.

But if they can find a program manager like Columbia that sees business sense in taking on the resident plan as a loss leader, they can once again be competitive.