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Obama Drops 529 Tax Plan; New College Saving Bills Floated

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Bowing to pressure from Republicans and college savings proponents, President Barack Obama withdrew his plan to impose a tax on qualified distributions from 529 college savings plans.

After House Speaker John Boehner, R-Ohio, as well as Rep. Nancy Pelosi, D-Calif., both criticized the plan, the Wall Street Journal reported that a White House official said late Tuesday: “Given it has become such a distraction, we’re not going to ask Congress to pass the 529 provision.”

Joe Hurley, founder of Savingforcollege.com, told ThinkAdvisor in a Wednesday email message that “the reaction of American families to this [529 tax] proposal should have been anticipated by the president. After all, middle-class Americans have been sacrificing to save for their children and they are proud and protective of their 529 accounts.”

Published reports say that the administration will now focus on efforts delivering a “larger package” of education tax relief that will have bipartisan support.

Two bills have been introduced in January to help students reduce their college debt load and improve college savings plans.

Rep. John Delaney, D-Md., introduced legislation Jan. 21 to allow student debt to be discharged in bankruptcy.

Delaney’s bill, the Discharge Student Loans in Bankruptcy Act, H.R. 449, addresses what Delaney sees as a “huge student loan loophole in bankruptcy law that’s hurting real people.”

On Jan. 26, Reps. Lynn Jenkins, R-Kansas, and Ron Kind, D-Wis., introduced H.R. 529, which Savingforcollege.com says would “improve” 529 plans by including computers, Internet and computer equipment used primarily by the beneficiary as qualified higher education expenses; eliminating all distribution aggregation requirements, even when multiple accounts exist in a 529 plan with the same owner and beneficiary; and allow account owners to redeposit contributions to a 529 plan within 60 days after the school issues a refund of qualified expenses due to the beneficiary’s withdrawal from school.

Obama noted in his recent State of the Union speech that one of his goals is to help students reduce their college debt load by making community college free, and that he also wants to work with the new Congress “to make sure those already burdened with student loans can reduce their monthly payments.”

Obama has offered two such ways to lower students’ debt load — eliminating the tax on student loan debt forgiveness under Pay-As-You-Earn (PAYE) and other income-based repayment programs, and replacing the complicated student loan interest deduction for new borrowers with “more generous and more targeted tax relief” through other programs.

— Check out Student Debt Could Be Discharged in Bankruptcy Under New House Bill on ThinkAdvisor.

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