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President Obama Pushes for More College Saving Among Middle Class

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The Obama Administration is proposing a series of changes to 529 Plans, reports the LA Times, in order to encourage more middle class Americans to save money for college.

529 Plans allow you to contribute after-tax dollars, which then grow tax-free until withdrawal, as long as they are used for qualified education purposes.

(To learn more about 529 Plans, see Financial Aid Finder’s extensive section on College Savings and Prepaid Plans.)

According to the Treasury Department, only 5% of middle-income Americans take advantage of these plans, despite their lucrative tax benefits. Among high-income filers, however, one in three have a 529 account. The College Savings Plan Network reports that there are some 11 million 529 accounts to date, with more than $100 billion in assets.

The Obama Administration’s task force on middle class college saving has recommended a series of changes, including:

  • Making contribution limits uniform in all states to stamp out potential abuses
  • Creating uniform reporting standards so that it’s easier to compare plans
  • Requiring all states to offer at least one low-cost, low-maintenance plan based on index funds
  • Requiring states to eliminate the “home state bias” in not offering tax deductions/credits to those who invest in another state’s 529 Plan (If you live in Arizona, Kansas, Maine or Pennsylvania, you already are allowed to claim a deduction regardless of which state plan you contribute to.)

Many experts think the president’s plan doesn’t go far enough, and want to see states required to offer matching grants to families below a certain income level (some states already do this) and want 529 assets to be completely exempted from financial aid calculations.

I’ll tell you from my perspective, I would also like to see the plans become less restrictive in terms of “qualified education expenses”.

You see, I’ve lived and studied abroad and want my children to have that option, as well. But 529 Plans are pretty limiting in terms of where you can use the assets to study. Yes, some plans allow you to study outside the U.S., but it must be at a foreign institution that has U.S. accreditation. My hesitation over this restriction has actually caused me not to invest in a 529, despite the amazing tax benefits.

What about you? Are you currently invested in a 529? Why — or why not? Would any of the President’s current proposals sway you toward investment if you aren’t currently?

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