SUNDAY TALK WITH SENATOR GRASSLEY: Discussing the Bill to Enhance Section 529 College Savings Plans

Legislation from Senator Chuck Grassley to enhance the already successful Section 529 college savings plans program has passed out of the Finance Committee on a unanimous 26 to 0 vote.

Grassley addressed the topic in a video:

The bill plays a key role in the ability of parents to fund their students college education.

“These reforms will make it even more appealing for parents to use 529 college savings plans,” Grassley said.  “The additions give more flexibility for using the tax-free savings.  The more flexibility, the more people use something like this.  The bill also sends the message to families that Congress supports this program and will fight efforts to get rid of it.  The House of Representatives passed its version of the bill with strong support.  The full Senate should follow suit.”

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Grassley introduced his bipartisan bill in February.  The bill builds on improvements to 529 college savings plans enacted in 2001 and 2006 under Grassley’s leadership on the Finance Committee and with broad bipartisan, bicameral support.   The 2001 law made distributions from the plans tax-free if used for education expenses but it was scheduled to expire.  The 2006 law made the tax-free provision permanent.

The new bill has three main provisions.  The first provision recognizes the reality that in today’s world, a computer is just as much a necessary educational expense as a required class textbook.  As such, this bill allows 529 funds to purchase a computer on the same tax-favorable basis as other required materials.

The second provision eliminates an outdated and unnecessary aggregation rule that increases paperwork and costs on plan administrators.

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The third provision provides tax and penalty relief in instances where a student may have to withdraw from school for illness or other reasons. Under current law, any refunds from the college are subject to immediate taxation and a 10 percent tax penalty.  This provision eliminates this tax and penalty if the refund is redeposited in a 529 account.  This permits a family to set the refund aside to pay for the student’s education should he or she be able to return to college or to use it for another family member.

The 2001 and 2006 changes greatly increased the popularity of 529 plans, and the new bill has the potential to attract even more families.

Various studies and statistics suggest that 529 plans are largely held by middle income families, despite representations that the plans largely benefit high income taxpayers.

For College Savings Iowa, $17,878 is the average account balance, $133 is the average amount contributed via automatic payments, and $25 is the minimum to open an account or contribute.