Recently, Sens. Max Baucus, D-Mont., and Orrin G. Hatch, R-Utah, started rebuilding the tax code from scratch, aiming to eliminate all existing tax breaks and loopholes. As the code gets rebuilt, the tax benefits associated with Section 529 college savings or prepaid tuition plans could be at risk of being eliminated. 529 plans are designed to encourage early saving for future higher-education expenses, and the tax benefits are an important part of their increasing popularity and success — it is critical that the tax benefits for 529 plans remain intact.
Currently, earnings in a 529 plan grow tax deferred and are free of federal income tax when used for qualified higher-education expenses (which include tuition, mandatory fees, books and supplies, and room and board). Additionally, most states allow tax-deferred earnings and tax-free withdrawals for qualified higher-education expenses, and some states allow families to deduct the full or a partial amount of their contribution from their state income taxes.
The tax advantage is a primary benefit of investing in a 529 plan, and it serves as a motivator for Americans to start saving early for their children’s education.
The data speaks for itself: Children with a college savings account are six times more likely to attend a four-year college, compared with those with no dedicated college savings account. According to the U.S. Census Bureau, college graduates earn an average of $1 million more than high-school graduates during their careers. It is in our country’s best interest to defend tax exemption for 529 plans, so that all families — particularly lower- and middle-income families — continue to stay as dedicated as possible to saving for their children’s futures.
College costs have risen nearly 51 percent over the past decade; for the average family, figuring out how to pay can be overwhelming. Many families rely on financial aid to supplement savings, but more than half of federal financial aid is in loan form that not only must be repaid but also incurs interest. Students are graduating from college with burdensome loans to pay back, and higher numbers than ever are quitting school because of mounting debt. Among other social issues, this contributes to the great divide between low- and high-income families.
529 plans exist to help make higher education more attainable for everyone. As a strategy to offset the need for loans and keep families from getting saddled with debt, Section 529 college savings and prepaid tuition plans are a manageable and affordable alternative.
In 2012, American families invested a record $190 billion in 529 plans, according to data collected by the College Savings Plans Network. Congress should do all it can to continue this trend; protecting the tax benefits associated with 529 plans is a step we can take to assure that Americans will continue saving for college and reduce the need for student loans.
The tax benefits for 529 investors need protection: This isn’t a loophole for the rich. It is an incentive to keep Americans well-educated and prepared for the workforce. Let’s be sure to preserve this incentive for hardworking American families.
Michael L. Fitzgerald is chairman of the College Savings Plans Network and treasurer of the state of Iowa.