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.