Who Pays for Community Colleges?

~ Laura

This article in Reason is getting a lot of traction.

Obama previewed his plan for “free” community college for students seeking associate’s degrees a couple of weeks ago. The administration has put a price tag of $60 billion over 10 years for it (which means it’s likely to be much higher). Part of how Obama plans to pay for it is to tax the special saving funds, called 529 plans, that people can use to gather money to pay for their children (or themselves) to go to college:

Under current law, 529 plans work like Roth IRAs: you put money in, and the money grows tax-free for college. Distributions are tax-free provided they are to pay for college.

Under the Obama plan, earnings growth in a 529 plan would no longer be tax-free. Instead, earnings would face taxation upon withdrawal, even if the withdrawal is to pay for college. This was the law prior to 2001.

As you may recall, I argued that Obama’s “free community college” plan was a subsidy for college administrators and bureaucrats, not students. Nothing could make my analysis more clearly true than to literally tax people’s college savings in order to give more money directly to colleges.

Published by Laura

7 thoughts on “Who Pays for Community Colleges?”

  1. “Limit upside-down education savings incentives and consolidate them into a single benefit. The President’s plan would consolidate education savings incentives into one vehicle and redirect the savings into the better targeted AOTC. Specifically, the President’s plan will roll back expanded tax cuts for 529 education savings plans that were enacted in 2001 for new contributions, and – like Chairman Camp’s tax reform plan – repeal tax incentives going forward for the much smaller Coverdell education savings program.”

    This is the relevant section — note that it does not effect current savings — it merely reduces the tax preference for future contributions, presumably for those who are not eligible for the other education savings programs. I suspect that the tax-free earnings/savings of 529 plans accrue heavily to the wealthy. First, to benefit, you have to have the money to put into a 529 plan, to tie it up, and to take the risks associated with an investment. Second, as with any tax-break, those who pay the heftiest taxes benefit the most. I benefit from the 529 tax benefit, but I wouldn’t be that distressed about it going away, as part of a plan to skew taxes towards the wealthier taxpayer.

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  2. I haven’t paid any attention to Obama’s tax plan, because it stands no chance of enactment, so I had no idea that he was planning to start taxing Section 529 plans. That’s the most ridiculous idea I have heard in quite some time. It’s no wonder the Democrats have lost the middle class.

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    1. i.e. returning to the tax plan of 2001. Because, after all 14 years means that not having to pay taxes on something is an entitlement that can never be changed. I’ve become completely dissatisfied with the use of tax breaks to skew economic decision making. And that applies to electric car tax breaks as well as 529 plans.

      (But, I agree that his plan has no chance of being enacted. The question is whether anything at all has a chance. They did pass the ABLE account, which Forbes referred to as the 529 plan for developmental disabilities: “Given its limitations, ABLE may turn out to be more tax shelter than serious solution.”).

      http://www.forbes.com/sites/beltway/2014/12/04/are-tax-free-able-accounts-the-right-financial-solution-for-people-with-disabilities/2/

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      1. It’s not even the most ridiculous idea I’ve heard all week. I’m tired of getting “nudged” on tax-break stuff also. You have to have more money that me before it’s worth the rat-going-for cheese feeling.

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    2. I agree in your assessment of the ridiculousness of that idea. Tax free education and retirement savings shouldn’t be tampered with at all.

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  3. As a college administrator, I’m particularly worried about the costs associated with administering a program like this — should it ever become reality. Unfortunately, I can see a whole new section of the Dept of Education being formed and somehow or other, there will be people working for DOE ‘administering’ this program who will paid upwards of 100,000 dollars a year PLUS a nice retirement plan, benefits, etc. — all while “administering” adjuncts who make 2500 dollars a course, no benefits, no retirement. Yes, this program will cause some people’s standards of living to increase, but it’s unlikely to be the students or the professors at the community colleges. It might also mean that as they set criteria for achievement at the community college level that would have to be met in order for students to get the funds, the whole community college system loses individual autonomy and ends up having to behave and look quite similarly everywhere in the US.

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