President Obama's aborted attempt to tax 529 plans may end
up being a boon to the state-run college savings plans. Widespread outrage at
the proposal he floated in January - from both Democrats and Republicans -
brought it down two weeks later. But all the nationwide media attention the
college savings plans received gave them a much-needed boost in publicity.
Indeed, many parents don't know that the 529 college savings
plans exist, which means that many families miss out on one of the best,
tax-advantaged ways of encouraging education and limiting student-loan debt. The
plans allow families to invest money in tax-deferred accounts that can be used
at any accredited college or university in the United States, and a few abroad.
Assets in 529 plans have grown steadily since the IRS
formulated rules for them in 1996, and got a big boost five years later when
Congress made distributions from the plans tax-free if used for qualified
higher education expenses. By the end of last year, more than $225 billion had
been saved in about 11 million participant accounts, according to Strategic
Insight, a mutual fund research company.
LACK OF AWARENESS
The plans try to get the word out through television
commercials, social media campaigns and outreach to schools. In Virginia, where
TV ads feature a fuzzy green "tuition monster," 529 awareness is up
to 69 percent of families with children under 18, said Mary Morris, chief
executive of Virginia529, the nation's largest college savings plan.
For many other plans, though, increasing awareness and
participation is a challenge. Even offering free money may not be enough. Still,
although the state used to offer parents of every newborn child $500 from a
private scholarship fund if they opened a 529 account, only 40 percent of
eligible families did, said Bruce Wagner, chief executive of Finance Authority
of Maine, which oversees the plan.
At least 11 other states offer matching grants and most
states offer tax deductions, as well. While matching grants are sometimes
limited to lower- and middle-income families, the state and federal tax breaks
are more valuable the higher a family's tax bracket is. That, plus certain
gifting and estate-planning advantages is what led the White House to target
529s as a tax break for the rich and to try to do away with the tax-free
In the backlash, 529 advocates said that most accounts are
held by those with annual incomes that are below $150,000. While they may be
wealthier than families who don't have 529s, they're also less likely to get
financial aid, and thus more likely to need their savings to pay for college,
That still leaves plans facing what may be the biggest
obstacle: Parental procrastination. Families often focus too late on how much
college will cost and how they will pay for it, said Martha Savery, spokeswoman
for the Massachusetts Education Financing Authority.
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