In President Obama’s recent State of the Union Address, he outlined an agenda focused on what he called middle class economics, which he described as providing Americans with the ‘‘tools they needed to go as far as their effort and their dreams will take them.’’ Our country thrives when hard-working Americans prosper. The President was right to praise policies, such as the GI bill and Social Security, that have helped us to do just that.
That is why I was perplexed at the President’s proposal to tax the earnings of what are known as 529 college savings plan accounts. This proposed new tax would greatly diminish the benefits of a law that is helping millions of parents plan for their children’s futures. And that is why I spoke on the Senate floor in opposition to the President’s proposal that undermines the very values we should be promoting — families making sacrifices today in order to better provide for their children’s education tomorrow.
The President’s plan would also lead to more student loan debt for many young people at a time when concern over the level of debt is rising. The President also proposed eliminating the tax deduction on interest on student loan payments.
One of the first questions new parents ask themselves is how will they be able to pay for their children’s education. For the past 14 years, the 529 accounts have been an important part of the answer. They have allowed parents to save for their children’s education in tax-advantaged accounts. Regular, affordable contributions made with after-tax dollars from their paychecks grow over time. When college years start, those savings and the earnings from their investments can be withdrawn tax free for educational expenses.
These small sacrifices made from paycheck to paycheck can have an enormous impact, making real the dream of higher education. Parents know that receiving a college degree greatly improves their child’s future earnings potential. In fact, according to data compiled by the U.S. Census Bureau in the year 2011, individuals with college degrees earn approximately $1 million more over the course of their careers than do workers with high school diplomas. Census data also showed that people with higher levels of education are more likely to be employed full time year-round. College graduates also tend to have access to more specialized jobs that, in turn, yield higher wages.
Critics of the 529 plans assert that they disproportionately benefit very high-income families who could afford to pay for college without the tax-free growth in these dedicated savings accounts. Data from the College Savings Foundation, however, counters this assertion. According to the foundation, the average value in one of these 529 accounts is a modest $19,774. Additionally, the average contribution to accounts that receive regular electronic contributions, such as those coming from paycheck withholding, is just $175 a month. That is clearly more in line with hard-working families trying to make ends meet than with affluent families who enjoy significant disposable income.
Maine provides a great example of the benefits of the 529 law. After this law was passed in 2001, thousands of Maine families established these accounts, but then came a powerful extra incentive. In 2008, the Harold Alfond Foundation, which was established by one of Maine’s greatest philanthropists, created the Harold Alfond College Challenge. This program now provides a $500 contribution to the college savings account of every baby born in Maine.
To date, some 23,000 Maine families have used this generous gift to begin planning for the future education of their children. As their parents’ own contributions are added to the account, the future becomes even brighter for these children and for our State. As the children grow and make their own contributions from after school and summer jobs, so too grows their appreciation of financial responsibility and self-reliance.
The President said his proposal is driven in part by the need to simplify the tax code. Our tax code certainly needs simplification, and I hope that becomes a major accomplishment of this Congress. But the question must be asked—how does creating a difference between the 529 contributions already made, which would remain untaxed, and new contributions, which would be taxed, simplify anything? And perhaps more to the point, in addition to simplification, our tax code needs predictability.
Before I joined the Senate, I was worked at Husson University in Bangor —an outstanding institution that has a high percentage of students who are the very first in their families to attend college. Every day, I saw how hard parents and students worked, how many sacrifices they made in order to make higher education a reality.
My experience at Husson is the chief reason why one of the very first bills I introduced when I joined the Senate was the College Affordability and Access Act. That bill called for creating tax-preferred education savings accounts—the precursor to the Coverdell savings accounts—tax incentives for employer-provided educational assistance, and a tax deduction for student loan interest. Many provisions of that bill are now law but would also be harmed by the President’s proposal.
The 529 college savings plan program channels the determination that I saw while working at Husson University and that exists throughout our great country into a tangible benefit built upon the virtues of saving and planning for the future. Changing the tax rules for the 529 accounts would break a promise to families across this country who are working hard to save for their children’s educations to help them attain a brighter future.
Fortunately, it appears that the President’s ill-conceived proposal is going nowhere. Shortly after other Senate colleagues joined me in raising objections to the President’s proposal, the White House announced that the Administration would reconsider it. Sometimes, even in Washington, common sense prevails.