Tax advantaged 529 college savings plans help families cover the costs of tuition and supplies but do little to lower student loan debt, which can often be devastating to borrowers. A pair of legislators, Lynn Jenkins, the Republican from Kansas, and Ron Kind, the Democrat from Wisconsin – think they have a way to help borrowers with their student debt. They plan to turn student loan debt into a qualified expense under a 529 plan and to encourage employers to contribute to those savings vehicles similar to how they kick into 401 (k) retirement plans.
Dubbed the 529 and ABLE Account Improvement Act of 2017, the politicians said the bill will encourage employers to contribute to both 529 plans and ABLE accounts, which are similar to 529 plans but are for children with disabilities.
Up to $100 in employer contributions to the accounts would be excluded from taxes. Small businesses that contribute to 529 plans and ABLE accounts would get a credit to cover the cost of setting up payroll deduction for the two savings vehicles.
Under the current law, students who withdraw money from a 529 plan to pay student debt have to pay taxes and penalties on the action. The new bill would eliminate that penalty and hopefully help to chip away at student debt which today stands at more than $1.3 trillion. Under the bill individuals who have both a 529 and an ABLE account will be able to move money between the two accounts as long as it’s for the same family member.
The move of the politicians comes at a time when families around the country aren’t doing that great of a job at saving for college, although there have been improvements in recent years.
While 529 plans are the preferred method of savings for college, as contributions are tax free if they are used for qualified expenses, they aren’t as ubiquitous as 401 (k) plans.
According to Strategic Insight the amount of assets in 529 plans increased by 2.1 percent in the first quarter of 2016 compared to the fourth quarter of 2015, and is up 1.5 percent over the course of the year.
Student loan lender Sallie Mae found in its How America Saves for College 2016 report that 57 percent of parents said they are saving for college – up 9 percentage points from 2015. The report also found that the average family is saving $16,380 for college, which is also an increase, but still a fraction of the cost of most four-year degrees.
Author: Dave Rathmanner
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