Obama’s Tax On College Savings

Ryan Ellis is alarmed by the president’s proposal to make 529 plans, which are basically IRAs for college savings, much less attractive:

Already, it’s difficult for middle class families to find discretionary after tax income for college savings plans. Besides paying the bills and staying out of high interest debt, there are better uses of savings for most families–notably retirement and a down payment for a home. Raising taxes on 529 plans would probably deal a death blow to their widespread use, a kind of anti-savings tipping point.

Karen Weise isn’t so worried:

Obama pairs these reductions with expanding the remaining education incentive, the American Opportunity Tax Credit, which is set to expire in 2017.

Obama signed the AOTC into law in 2009 as part of the federal stimulus program, and it gives up to $2,500 in credits to families with incomes as high as $180,000. The AOTC does share some of the regressive nature of the tax programs—about a quarter of familiesthat claim the credit make more than $100,000—so Obama’s new proposal would make the AOTC permanent and take steps to boost how the AOTC helps lower-income families.

Jordan Weissmann supports Obama’s plan:

Obama wants to tax college savers. But, by and large, they’re wealthy college savers. When the Government Accountability Office looked at 529 plans and their less popular cousins, Coverdell accounts, it found that 47 percent of families that had them earned more than $150,000 per year. (Depending on who’s measuring, that puts them in at least the top 10 percent of U.S. households.) By comparison, it noted, the median income of families with a student in college is $47,747. I don’t know about you, but I generally don’t think that our higher education policy should be geared toward helping families that earned $150,000 or more send their kid to the most expensive possible school.

Reihan is open to the idea for different reasons:

I’m all for helping families, including well-off families, save and build wealth. The reason I’m sympathetic to paring back the benefits associated with 529 plans is that tuition tax breaks appear to be an extremely ineffective way of making higher education more affordable — indeed, one scholar I trust, Andrew Gillen of Education Sector, has actually suggested that they might contribute to tuition increases.

How, you ask? All kinds of financial aid, from direct grants to low-income students to tuition tax credits that benefit all students, including high-income students, increase demand for higher education. It is important, however, that while direct grants to low-income students only increase demand for low-income students, who are less likely to go to college than more affluent students in the first place, tuition tax credits increase demand for all students, including those who are already willing and able to spend large sums on higher education. Colleges can respond to increased demand by increasing supply (e.g., admitting more students), by becoming more selective, or by charging higher prices to capture more of the aid.