President Obama's College Plans and You

If you watched President Obama's State of the Union or have been following the media reports about his agenda you have probably seen a headline on "Free Community College" like this story in the New York Times.  In addition, you might have also heard about other plans to tax withdrawals from 529 savings accounts - which are investment funds specifically for the purpose of paying for college.

So you may be asking, aren't these two policies in conflict?  On one hand you are proposing free community college, but on the other hand you are penalizing families who would use 529 funds to cover attendance at four-year colleges.   Aren't community colleges inexpensive anyway and 4-year colleges where cost relief needs to come from?  A very good point.

Let me try to explain what the President has in mind and how it might impact you.

Free Community College
Yes, you heard it right.  The President is proposing that all who enroll in a community college, earn at least a 2.5 grade point average, enroll consistently and at least part time can get their community college tuition covered by a program that would be funded by a combination of federal and state dollars. So right off the bat, you can see two major hurdles for the President.  He would need both the Republican controlled U.S. Congress and state legislatures across the country to ratify the plan. Many think this makes the proposal dead on arrival.   However, there are elements of the proposal that could survive.  One particular thing to watch is whether the federal government gets involved in the issue of poor community college graduation rates.  Key to the plan was that community colleges participating in the program would have to make some significant changes to student support systems and be accountable for graduation rates.   David Brooks makes the case for preserving that part of the plan and it could be a component families looking for affordable college options might monitor.

Taxing 529 Accounts
On the flip side.  President Obama is proposing taxing withdrawals from 529 savings accounts.  I have written about the value of these accounts in a previous post as a way to save for college. The tax is part of the President's "Middle Class Economics" strategy. The idea is to tax the earnings of from investments, which would include 529 plans. His argument is that a high percentage of families who invest in these plans are higher income homes that make over $200,000.00 per year.  The White House argues that the tax would be levied on the students, not the parents and because students are typically low income, the tax would be mitigated by their low earnings.  The bottom line here is that to avoid these taxes, you might have to consider having your son or daughter file taxes independently and count the 529 funds as income.  However, unless they have developed a wiz bang app for the Iphone and are taking down serious money, the tax would be mitigated or eliminated because of their standard deduction and low income.

Tax Credit for College Costs
The President also proposes consolidating and simplifying the number of tax credits for those paying tuition for college.  The proposal would consolidate existing programs into the existing American Opportunity Tax Credit (AOTC). The full tax credit of up to $2,500.00 is available to individuals who have an adjusted gross income of $80,000.00 or less or married couples with incomes of $160,000.00 or less.  By consolidating existing programs under AOTC, he hopes more families will access the program.  In addition, he is expanding access to the program for those students who enroll less than half time.  His hope is that the losses from 529 plan will be more than compensated for by greater participation in AOTC.

Ending Student Loan Interest Deduction
The final component of the plan is to end the deduction on interest from student loans. The argument for eliminating the deduction is that the benefit reaped by borrowers is quite low, usually no more than about $100.00 and that those resources could be more effectively utilized to cover the costs for students who are currently enrolled in college.  The fact of the matter is that you would need to be in repayment mode on your loans to benefit, which means you are not enrolled in college.  It makes more sense to put money toward supporting students who are in college.

It very well may be that none of the proposals here ever see the light of day.  On the other hand, education issues and workforce training are high priorities for both parties, so I suspect that something will be passed.  College Prep Pop will be looking for proposals from the Republicans and do our best to keep you informed of what is happening.