The White House is giving up on a costly fight with Congress over the Obama administration’s increasingly unpopular proposal to effectively end 529 college savings plans.
A White House official confirmed the move on Tuesday as fierce opposition to the provision was building in Congress, even among fellow Democrats.
“Given it has become such a distraction, we’re not going to ask Congress to pass the 529 provision so that they can instead focus on delivering a larger package of education tax relief,” the official said.
Also known as “qualified tuition programs,” 529 college savings plans are typically offered by the states and allow holders to save money and withdraw it tax-free, as long as the proceeds are used towards approved college costs — typically tuition, fees, room, board and other required supplies. Another kind of 529, prepaid tuition plans, let savers prepay for future tuition and lock in current prices, but they typically do not cover other expenses.
The reversal was a clear signal the White House had underestimated the popularity of the college savings plans and the backlash any proposal to end the program would cause. Republicans said the idea, floated as part of the Obama administration’s upcoming budget plan, contradicted President Barack Obama’s recent State of the Union theme of “middle class economics.”
“It’s another example of his outdated top-down approach when our focus ought to be on providing opportunity for all Americans,” House Speaker John Boehner said on Tuesday.
Maine Sen. Susan Collins, a moderate Republican, said the plan never made sense.
“It would have led to more student loan debt and undermined the very values that we should be promoting,” she said in a statement.
The political damage on Capitol Hill was so clear to House Minority Leader Nancy Pelosi that she lobbied senior administration officials to drop the proposal even as she was flying on Air Force One with the President from India to Saudi Arabia, a source familiar with the White House decision said.
It is unclear how much effort the White House was ever willing to muster to push its 529 plan. There was no mention of the proposal in the President’s State of the Union speech.
“We need a tax code that truly helps working Americans trying to get a leg up in the new economy, and we can achieve that together,” Obama said broadly about his education plans.
A White House official said the administration can still more than pay for its education proposals, even without the 529 provision, based on savings realized by closing the so-called “trust fund loophole” for wealthier Americans.
A White House official said the administration remains committed to other portions of its education tax reform plan.
“The 529 provision is a very small component of the President’s overall plan to deliver $50 billion in education tax cuts for middle class families,” the official said. “We proposed it because we thought it was a sensible approach, part of consolidating six programs to two and expanding and better targeting education tax relief for the middle class.”
The White House reversal on the 529 proposal was first reported by The New York Times.
Late Tuesday, Boehner welcomed the White House decision.
“I’m glad President Obama has decided to listen to the American people and withdraw his tax hike on college savings. This tax would have hurt middle-class families already struggling to get ahead,” Boehner said in a statement.