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Financial Planning > College Planning > Saving for College

The Obama Budget: The Effect on College Savings Programs

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President Obama’s $787 billion American Recovery and Reinvestment Act and his 10-year budget outline have a potentially high impact on higher education. First, the Administration has proposed a major change in the $85 billion-a-year student loan industry, with plans to designate the government as the sole provider of federal student loans, ending the participation of private lenders, such as Sallie Mae, whose stock price fell 31% on February 26 in response to the news.

The proposal, included in the February 26 budget outline, would end government-guaranteed loans to students by banks and other private lenders–lending that has totaled $56.7 billion in the current school year. The Administration said the shift, which would result in all federal loans coming directly through the government, would save $4 billion annually and $47.5 billion over the next decade, if approved by Congress.

“President Obama’s economic recovery plan is a victory for college students and their families,” said U.S. Rep. George Miller (D-California), the chairman of the House Education and Labor Committee, in a note on his Web site. “A sustainable economic recovery depends heavily on guaranteeing that our students can continue to have access to an affordable college education.”

Also in the proposed budget, the federal Pell Grant program would be adjusted to inflation for the first time since the program began.

The stimulus bill increases the Pell Grant scholarship by an additional $500/year, from the current maximum grant amount of $4,730, to $5,350 as of July 1, 2009. In 2010, the maximum grant amount will rise to $5,550.

The legislation will also provide students and families with a new, partially refundable college tuition tax credit of $2,500. “For students attending post-secondary school in 2009 and 2010, the Hope Scholarship credit is beefed up under the Act,” notes Joseph Hurley, 529 guru and founder of, in his latest Web posting. “The new temporary version, called the American Opportunity Tax Credit, is available to more families than was the old Hope credit,” he adds.

Under the stimulus bill, the maximum annual credit amount increases from $1,800 in 2008 to $2,500 for this year and the next. Furthermore, the full credit would be available to those making less than $80,000 ($160,000 for joint filers). However, students will need to spend at least $4,000 a year to receive the full credit. Taxpayers with incomes up to $90,000 ($180,000 for joint filers) would get a partial credit.

Hurley also alerted his readers to the impact that the stimulus bill could have on how clients build and spend their 529 plan. For example, the list of eligible 529 expenses is expanded to include purchases of computer technology and equipment, along with Internet access for students and their families. “However, this expansion applies only to the years 2009 and 2010; starting again in 2011, computers etc., do not qualify unless required by the educational institution as a condition of enrollment or attendance,” he cautions. See Hurley’s blog entry ( for his suggestion on how to use 529 accounts in 2009 or 2010 to purchase a computer for a teenager who won’t be enrolling in college until after 2010.

Finally, the Act provides an incentive for college freshmen to move off campus and purchase a home before 2010. First-time homebuyers receive a 10% tax credit on the purchase price of the home, up to a maximum $8,000 credit; however, the credit must be repaid if the buyer moves away in less than three years. “So beware if your child later wants to transfer schools,” Hurley writes. Housing costs qualify for tax-free 529 treatment, although the student must be enrolled at least half-time, and the eligible amount for an off-campus student is capped each year to the amount reported by the school in its “cost of attendance” summary, according to Hurley.


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