For critics of the 529 program who supported the Obama proposal to scale it back, the last two months have been both dizzying and demoralizing. "It's now a third-rail issue," said Susan Dynarski, a professor of education and economics at the University of Michigan. "You're not going to see anyone propose to change [the accounts] for a long time." Dynarski argues that the 529 program is poorly structured to expand access to higher education, because the families that benefit already send their kids to college at high rates compared to those who earn less. According to IRS data cited by the Wall Street Journal, about 70 percent of the tax benefits go to households with annual incomes above $200,000. If the goal is to help more people go to college, Dynarski said, "this is about as backwards as it gets."
The proposal now before Congress would exacerbate the problem by providing "a shelter for high-end consumption," she said. For wealthier families, "your latest MacBook Air gets bought at a tax break under this scenario." While Dynarski said she would scrap the entire program in favor of more progressive tax policies, she said Congress could start by creating an income cap to more narrowly target it to the middle and working class.
Part of the debate over the 529 program centers on the loose definition of what constitutes "middle class" in the U.S. today, as well as the skyrocketing cost of college tuition. Even for a household earning $150,000-$200,000 a year, tens of thousands of dollars to send a single child, without financial aid, to a four-year college remains a steep price. "Every family deserves to have the opportunity to save for college," Lochner said. "Even if you’re wealthy, college is an expensive cost."
Lochner and Jenkins disputed the argument that the benefits of the 529 program go disproportionately to the wealthy. The average amount in each account, they said, was about $20,000, which is barely enough to pay for a single year of tuition at many universities. "Wealthy people don’t need to go to a 529 plan to save for their kids’ education, they just write a check," Jenkins said.
On the other hand, a family without enough saved up in a 529 plan to cover tuition won't derive much additional benefit from the new provision allowing them to use the plans to buy computers. It's families that have already put away enough money to cover tuition and buy textbooks that can best leverage the new loophole, using it to shield more spending. If the law passes, they will be able to purchase computers, software, and accessories for their children with tax-advantaged dollars.
There are no restrictions in Jenkins's proposal on the type of computer, or software, that can be purchased with money from the tax-advantaged accounts. None are needed, they said. "I don’t think there was anybody really feeling like we needed to police that, just like we don’t police what books they’re buying," Lochner said.
The proposal is not exactly a deficit-buster—it costs just $51 million over 10 years. And in a divided Congress that can barely keep the government open, a bill picked out of the legislative dustbin may become one of the few GOP proposals to make it into law this year. Perversely, Jenkins and her allies have the Obama administration to thank for that.