Lawmakers Move to Improve Benefits of College Savings Plans

Congress is moving to expand the benefits of popular 529 college savings plans.

In a first step, the U.S House of Representatives overwhelmingly approved (401-20) legislation to relax rules governing 529 funds.

Earnings from “qualified tuition programs,” commonly called 529 accounts after Section 529 of the tax code, “are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board,” the IRS explains.

Even though computers, software and Internet access have become essential to college students, these costs currently are not eligible 529 expenses. That would change if new rules are approved, according to CNN Money.

… under the current rules, 529 withdrawals may only be used to buy equipment “required for enrollment or attendance.” And computers, software and Internet access don’t always meet that criteria, unless one is pursuing an engineering or technology-related degree, according to Mary Morris, chair of the College Savings Foundation.

(A temporary provision allowed 529 funds to be used to purchase computers in 2009 and 2010, but lawmakers allowed that provision to expire.)

Another provision targeted for change applies to students who use 529 funds and subsequently discontinue their studies. If a student is using 529 funds to pay for school today, but has to drop out because of illness or some other reason, a refund to the 529 plan is subject to income tax and sometimes even a 10 percent penalty. That provision would also change under the proposed legislation.

“It would also simplify how taxpayers calculate their benefits associated with the plan and would allow families to redeposit tuition refunds back into a 529 account without penalty,” Inside Higher Ed said.

This move by Congress to make 529 college savings plans more flexible and user-friendly comes on the heels of a failed White House proposal to restrict 529 tax benefits. An identical bill has been introduced in the Senate, with sponsorship from both Democrats and Republicans. One of the bill’s sponsor’s, Sen. Richard Burr (R-N.C.), said is a statement:

We need to do everything we can to encourage families to plan and save for the high cost of a college education. … This legislation builds on the sound model of the Section 529 plans, providing families flexibility in how to save, and reducing the need to borrow.

My husband and I use 529 plans to save for our children’s college expenses, so I selfishly applaud this move forward.
What do you think about the possible expansion of benefits for 529 college savings plans? Share your comments below or on our Facebook page.