Democrats and Republicans rarely agree on anything these days on Capitol Hill, but one piece of legislation appears to be generating positive vibes from both parties.
The subject of such harmony is an effort to expand the benefits of the popular 529 college savings plans.
President Barack Obama had pushed to scale back the product in his State of the Union address in January before protests forced him to drop the idea. Now the attention has shifted to Congress, which has its own 529 agenda.
Last week the House passed 401-20 a bill — aptly named HR 529 — that would let college students use money from their 529s to buy computers and other technology.
Under current law, tax benefits from 529s — like the Kansas Learning Quest and Missouri MOST plans — apply only to “qualified” higher education expenses, including tuition, room and board, and books.
Debate now shifts to the Senate, where a similar bill has been introduced by sponsors from both parties. No date has been set for a hearing before the Senate Finance Committee.
State-sponsored 529 accounts climbed to 12.1 million at the end of 2014, up more than 4 percent from a year earlier, according to a report this week from the College Savings Plans Network, a nonprofit organization representing state treasurers and college savings plan administrators. Collectively, those accounts hold a record $248 billion in money earmarked for college.
Contributions to the accounts are not tax deductible. But once the money is invested, it can grow and eventually be withdrawn with no tax on the earnings as long as the funds are spent on those qualified higher education expenses. Many states offer income tax breaks as well.
Besides the technology enhancements, the House bill and its companion in the Senate would allow withdrawn funds to be redeposited in a 529 account if a college issues a refund on qualified expenses, such as when a student withdraws from school because of illness. Under current law, families in those circumstances could owe tax and be hit with a 10 percent penalty on the portion of the refund attributable to earnings in the account.
The legislation also removes some technical details that sponsors say would eliminate unnecessary paperwork.
While President Obama has said he is not opposed to the proposed 529 legislation, there are no guarantees it will sail through. The White House has said it favors broader changes in higher education tax benefits that it believes would benefit the middle class more than the fixes in 529 accounts.
In a statement after the House vote, the White House said its higher education plan “would cut taxes for 8.5 million students and families and simplify taxes for every single college student who relies on education tax credits to help pay for college. The proposal before Congress would not achieve these goals and instead focuses exclusively on education savings plans that are used by less than 3 percent of American families.”
Asked to respond, the College Savings Plans Network said its data suggest that 529 accounts are largely held by middle-income families. Consider that the average account balance was a less-than-eye-popping $20,474 at the end of 2014. That’s about what it costs to attend many public in-state universities for one year.
In addition, the organization noted that about 40 percent of the accounts are funded with regular contributions that average $146 a month.
The College Savings Plans Network concluded by noting that children with a college savings account are “six to seven times more likely” to attend a four-year school compared with children with no dedicated college account. That type of motivation should be rewarded.