Bills
| 3.23.22

Letting Students Use Untaxed Savings (529 Plans) to Buy Computers for College (S. 335)

Do you support or oppose this bill?

What is S. 335?

(Updated March 15, 2018)

This bill would amend the Internal Revenue Code to clarify that college students can use funds from 529 college savings accounts to purchase computers -- if the computer will be primarily used while they’re enrolled at an eligible educational institution.

Introduced in 1996 to incentivize taxpayers to save money for their young relatives, 529 plans are college savings accounts that are exempt from federal taxes. These funds could only be applied to eligible institutions of higher education.

Under this legislation, distribution aggregation requirements for 529 plans would be eliminated. Previous changes in the tax treatment of 529 plans made their distributions tax-free, which makes aggregating the distributions unnecessary.

Refunds from colleges to a student’s 529 account would be permitted if they occur within 60 days of the student withdrawing from college. This would be a change from the current law, which subjects refunds to the income tax on earnings and a 10% penalty. This would only apply to distribution taken after December 31, 2014.

Argument in favor

Allowing college students to use funds from 529 plans to buy computers and eliminating redundant paperwork requirements are common sense reforms. More needs to be done, but this is a positive step.

Argument opposed

Taxing distributions and refunds from 529 plans brings in revenue that could be used to fund other education-related programs. These savings plans tend to disproportionately benefit the rich who can afford to pay.

Impact

College students with 529 plans and their families, college administrators, 529 plan administrators, computer manufacturers, and the IRS.

Cost of S. 335

The CBO estimates that this bill would decrease federal revenues by $51 million over the 2015-2025, which would increase deficits by about $4.6 million per year.

Additional Info

In-Depth: The House passed this bill’s identical companion on a 401-20 vote, and the Senate Finance Committee followed suit on a unanimous 26 to 0 vote.

Despite the overwhelming support for the proposal in its current form, the Senate Finance Committee’s ranking member Sen. Ron Wyden (D-OR) says that he hopes the committee “Can come together on a bipartisan basis to strengthen this legislation and then do even more, particularly for those who need the most help.”


Of Note: 529 plans and those who utilize them to save for college found themselves in the political spotlight after President Obama’s 2015 State of the Union Address. In his speech he detailed a plan to tax 529 funds upon their withdrawal like regular income. This would have ended the tax-free treatment of the college savings, which he and his administration viewed as disproportionately benefiting rich families. That tax revenue would then be used to expand an education tax credit targeted towards low- and middle-income families.

The proposed tax increase on 529 plans was met with hostility from both sides of the aisle, with House Speaker John Boehner (R-OH) and Rep. Chris Van Hollen (D-MD) voicing their opposition to the proposal. The Obama administration ultimately dropped the proposed tax increase.

As of September 2014, there were $240.7 billion deposited in 529 college savings plans. There are about seven million families with 529 college savings accounts, and there are a total of nearly 12 million 529 accounts.


Media:

Summary by Eric Revell
(Photo Credit: Flickr user dumbledad)