529 savings in America.

Graphic By Tanner Howard/MNS


After her first semester at the ­­­University of Nevada-Reno, 20-year-old English major Mariah Birnbaum hit a wall: she couldn’t afford her tuition. Despite being an A student in high school and with parents earning almost $100,000 per year, her costs mounted, and she didn’t receive enough financial aid to continue paying for school.

“I was denied financial aid because of how much my parents make,” Birnbaum said. “But they didn’t take into account that they were financially supporting four children.”

Birnbaum took on part-time retail work and enrolled at the College of Southern Nevada, a community college in Las Vegas. A sophomore, she is working her way through school to pay tuition. With the burden of already helping three older siblings with college expenses, it was nearly impossible for her parents to save enough for her college.

“We were all so close in age that I think it was difficult for my parents to find the extra income they could put aside,” she said in a series of email exchanges.

Now, a series of proposed reforms advanced by the White House could dramatically change the way that Birnbaum’s family ­– and millions of other families – build and access their college savings. While the reforms seek to aid low and middle income families trying to pay for college, the proposal could inadvertently hurt millions currently using a widely popular, tax-advantaged savings plan.

The controversial changes would alter the way in which families use 529 savings plans, a special investment vehicle typically administered by states as a way for millions of Americans to save for college. The proposed reforms would end families’ ability to remove money tax-free, something people have been able to do since President George W. Bush changed the status of the plans in 2001.

Under the current system, families can invest in 529 plans and use the earnings tax-free, as long as the money is applied to college expenses. President Barack Obama’s reforms would begin taxing these accounts when the money is withdrawn, with the money showing up as income in financial aid calculations.

The result, Obama hopes, is a shift of benefits from wealthier families to more low and middle-income families trying to pay for higher education. Through additional revenue earned from new taxes on 529 plans and from closing other tax loopholes, the president hopes to make the American Opportunity Tax Credit permanent. That credit is aimed at students from two-income families earning up to $180,000, making them eligible for up to $2,500 per year in tax relief for help in affording college.

As of September 2014, nearly 12 million 529 savings plans had earned seven million American families a total of $244.5 billion, according to research done by College Savings Plans Network. While millions of Americans save for college every year, only three percent use 529 plans, according to a 2012 report from the Government Accountability Office.

The GAO report found that families using 529 plans earned an average of $142,000 per year, nearly three times the average earnings of those without the plans.

Obama has focused on taxing 529 plans because a large number of families that use them are relatively high-income. Wealthier families benefit disproportionally from the current tax-free status of these plans, since they would pay a higher marginal tax rate if the plans were taxed like income.

According to Sandy Baum, senior fellow at the Urban Institute, low and middle-income families would be better served by savings plans that are easier to use than 529s. She argued that those who benefit most “are going to go to college anyways” with or without 529 plans, and that other methods must be used to help more families afford college.

“If you have a plan where a few dollars will be taken from every paycheck automatically, people will save that way,” Baum said in a phone interview. “Telling them that [their savings] are tax-deductible has much less impact on the behavior of low-income people.”

Other higher education experts see the Obama reforms as detrimental to middle-class families looking to save for their children’s educations. Mark Kantrowitz, co-author of “Filing the FAFSA,” and senior vice president of the college planning website, Edvisors.com, argues that the move away from 529 plans would disincentivize low and middle-income families from saving for college.

“If you provide a tax incentive and a financial aid incentive to save, families will try to find the money wherever they can,” Kantrowitz said. “They might not be able to save a lot, but it will put them in a better position when it comes to affording a college education.”

Kantrowitz argued that having college savings show up on a student’s financial aid application as income would result in low-income students receiving less aid. Ironically, wealthier students would be least harmed by this change, he argues, since they would be ineligible to receive federal Pell Grants in the first place.

“When you figure out the total impact [of these changes], it actually exceeds the typical earnings on a 529 plan,” he said. “Far from taking money from the wealthy and giving it to the poor, this would do the opposite.”

With the cost of college rapidly outpacing income growth in America, lawmakers are looking to a variety of methods to keep college accessible and affordable for all citizens.

The most sweeping is Obama’s recent proposal to make community college free to all Americans. He has called on Congress to authorize $60 billion in funding over the next 10 years to implement this proposal in cooperation with the states.

“Forty percent of our college students choose community college,” Obama said during his State of the Union address. “Whoever you are, this plan is your chance to graduate ready for the new economy, without a load of debt.”

Despite controversy over the methods needed to solve the issue of college affordability, experts agree that attending college is more important than ever. Research done by the Federal Reserve Bank of New York in 2014 shows those with a bachelor’s degree earn over $1 million more than a high school graduate during their working life.

Whether combatting rising college expenses costs by increasing savings or by reducing campus costs, the future of higher education in America is intimately tied to the future of the country as a whole. For Mariah Birnbaum, who plans on transferring to the University of Nevada-Las Vegas in the fall, education is an issue of great personal importance as well as a national priority.

“As a country and an individual, knowledge is power,” Birnbaum said. “If we can find a way to extend the opportunity for education to more people, that’s what our priority should be.”