House Eases Limits on 529 College Plans in Response to Obama

The U.S. House of Representatives voted to loosen restrictions on tax incentives for education savings, expanding a program that President Barack Obama wanted to limit.

The measure, which passed on a 401-20 vote Wednesday, would let people use tax-advantaged education savings accounts to pay for computers and place refunds from colleges back into their accounts without penalty. Bipartisan support in the House and Senate -- and lack of opposition from Obama to this narrow bill -- means that it stands a good chance of becoming law.

Just one Republican and 19 Democrats voted against the bill.

House passage of the relatively minor expansions comes a month after Obama proposed repealing the accounts’ main tax benefit. The accounts, known as 529 plans after the section of the U.S. tax code that allows them, are among the most popular vehicles for families saving for college.

Account owners set aside money after it has been taxed and then don’t have to pay income taxes when they spend it on higher education.

“There’s much to be done but today’s vote is a critical and simple step that Congress should take to empower folks to save for higher education,” said Representative Lynn Jenkins, a Kansas Republican who sponsored the bill.

The bill would cost the government $51 million over a decade in forgone revenue, according to the nonpartisan Joint Committee on Taxation. The Obama administration doesn’t oppose the bill, though it has other ideas for making college more affordable, White House Press Secretary Josh Earnest told reporters on Air Force One.

Obama Proposal

Obama in January proposed major changes to 529 plans as part of a broader plan to expand tax credits for higher education. Under Obama’s proposal, the investment income generated from new contributions to 529 plans would have been taxed when withdrawn, instead of being tax-free.

The president’s plan “would cut taxes for 8.5 million students and families and simplify taxes for every single student who relies on education tax credits to help pay for college,” Earnest said Wednesday.

A poll sponsored by the Associated Press and conducted from Jan. 29 to Feb. 2 found that 19 percent of Americans supported Obama’s 529 plan.

Administration officials, including economist Jason Furman, sought to justify the proposal by saying that the benefits of 529 accounts largely go to high-income households capable of setting aside money. After a barrage of criticism from account holders and lawmakers in both parties, the administration backed away from the plan within 10 days.

The bill is H.R. 529.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE