Time to Panic or Plan? Obama’s 529 Proposed Reform

As many college-bound families are aware, President Obama held a college-themed State of the Union address regarding 529 Plans on Tuesday, January 20^th.  He announced the intended strategy to reduce complexities surrounding educational tax credits, with the goal to reduce the cost of college for middle-class families.  His argument was that “unfair loopholes” generally aid those in the upper-class, and he proposes striking out such loopholes to even the playing field.

Their Plan of Action

How did congress intend to make this happen?  They proposed to “roll back” tax benefits of 529 college savings plans and to “repeal tax incentives going forward” for Coverdell Education Savings Plans

Currently, growth in 529 accounts are sheltered from tax if proceeds are used for a qualified education expense. When that benefit ends, 529s become no different than an ordinary mutual fund in terms of tax treatment.  Plus, in the new proposal, distributions from 529 accounts would not only be taxable, but would also be considered income to the student.  In financial aid eligibility formulas, student income has a high impact, rendering less students being eligible for need based financial aid.

In addition, another tax break via the American Opportunity Tax Credit (which provides for up to $2,500 towards tuition) is scheduled to end after December 2017.

Your Plan of Action

A slew of articles voicing backlash and support regarding these propositions have popped up daily.  The proposal is no longer on the table, but this leaves room for skepticism, distress, and understandable confusion.

What’s the common thread for most of these articles?  Families are not saving enough for college. We do need to save, but the 529 is not the only way, and for many families, not the best way to save for college.

Whether a 529 has been a part of your past college savings strategy or not, it’s time to review your college savings strategy to understand the best alternatives for your family. Contact us for a consultation, and we’ll steer you in the right direction.

Westface College Planning can help navigate the financial aid process from start to finish.  To learn how we can help you call us at (650) 587-1559 or sign up for one of our Tackling the Runaway Costs of College Workshops or Webinars.