President Obama wanted to end tax breaks on popular 529 college savings plans before backing off the idea. Guardian readers tell us why the plan was a bad one
It took just a week for President Barack Obama to say he made a mistake when he suggested that 529 college savings plans should be taxed.
The proposal, unveiled during the State of the Union address – part of the administration’s plan to expand tuition tax credits for middle class – ran into opposition from both Republicans and Democrats. The White House soon deemed the ensuing debate a “distraction” and quickly killed the proposal.
Related: Obama's plan for free community college explained step-by-step
My brother and his wife opened 529 accounts for my sons. Sending both boys to college would have been difficult for us, especially since the younger son is going to University of California, Irvine. Tuition there is $14,000 per year. We would have had to take out a second mortgage to pay for school.
We have a credit card from Fidelity that deposits a percentage of our spending into our son’s 529 plan. We also put gift money from grandparents into the account, and feel very lucky to have those gifts. For a while, we were making monthly contributions too but stopped because we felt we were getting behind on other financial goals. The tax deductions on 529 contributions have allowed us to save more for our son’s education. I have no illusions that we’ll have enough to pay for all of college, but I’d like to reduce the amount we have to borrow and the amount our son has to borrow to make it happen.
Would I give up my tax deduction on my 529 plan if it meant community college was free for everybody for two years? I think I would. Even better if they take away 529 tax deductions for high-income earners but leave it in place for the real middle class. (Which gets to the perennial debate about what exactly it means to be middle class …)
I am a single mother of two teenage children, one of whom is a senior in high school this year. Both children have 529 accounts to which my parents – their grandparents – contribute $1,000 a year. I also contribute on a regular basis. Recently that’s been at the $1,000-per-year-per-account mark, but early on that was not the case. I am counting on this money along with some financial aid to send my children to college [so that] way they don’t have to incur a lot of debt. If these were taxed, that is more money that I either have to come up with out of pocket or that my children have to borrow. Additionally, I would be taxed on my parents’ contributions, not just on my own.
Most of the 529 investment in Ohio was made upfront and during the first few years after opening the account. Once fully funded, the accounts were guaranteed to keep up with the average tuition cost at public universities in the state of Ohio. The accounts fully covered our children’s tuition expenses. Room and board expenses and books were paid for with other savings. We – and our children – were fortunate in that no student loans were required to fund their college educations, so our children graduated debt-free.
I contributed regularly for several years [and] also made a larger contribution from an inheritance. The full amount saved only covered room and board. We expect my daughter to have about $20,000 in loans by the time she graduates. She’s studying abroad this semester in London and this is a very expensive program. I feel fortunate to have had the option of the 529.
We started 529 plans for our two boys when my oldest was two years old and have contributed monthly since then. Back then, 529 plans were endorsed by local consumer advocates as a way for people with moderate incomes to do long-term savings for higher education and receive tax benefits. In my opinion, it is a great way to change behavior and save money for an expense that has increased dramatically over the years. While we did not save enough over that time to fund full tuition with room and board for a state school, it will help for the first couple of years and I’m happy we did it.
We make yearly contributions into each of our three children’s accounts from the money we receive from our tax returns. Each birthday, invitations include a form for family to contribute to their 529 plan in lieu of a toy or other gift. Other birthday and Christmas money is deposited into their 529 plans.
Continue reading...