NEW YORK (MainStreet) — Blame it on bipartisanship. Throw in some political expedience and voilàcollege savers got their 529 savings accounts back.

They never really lost them—it was tax-free withdrawals that the Obama administration took away. But infuriated critics in both parties—from House Speaker John Boehner (R-Ohio) to House Minority Leader Nancy Pelosi (D-Calif.)—equated this proposal from the State of the Union address with the elimination of these savings accounts and the rip-off of their constituents' money.

“Why won’t Pres. Obama just admit his tax hike on college savings will hit the middle class,” Boehner wrote on his Twitter feed last week. Earlier this week, he demanded that Obama’s proposal be withdrawn “for the sake of the middle class.”

Before the White house backed off on Tuesday, Rep. Lynn Jenkins (R-Kan.) reintroduced legislation endorsed by both parties to expand the 529s.

That the West Wing policy wonks and their boss were this clueless is enough to give any taxpayer pause. Yesterday’s decision was an abrupt about-face for Obama, who called the proposal part of the “middle-class economics” program he pumped in his State of The Union Address last week.

The Obama plan only looked at one side of the coin: those who made $200,000 and up and got a valuable tax shelter with 529s for their kids who were going to college no matter what. But Obama managed to throw the baby out with the bath water. His plan cost everyone their 529 benefits, not just the rich and the super rich.


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Obama’s plan was perhaps beaten at the start for a number of reasons, including its reliance on a flawed Government Accountability Office (GAO) report to make its case.

“Contrary to the December 2012 GAO report, college savings plans are used at all income levels,” said Mark Kantrowtiz, senior vice president and publisher of Edvisors.com, a source of intelligence on college financing. “The College Savings Foundation reports that more than 70% of 529 college savings plans are owned by families with income below $150,000. The 2014 Sallie Mae report, How America Saves for College, is consistent with low- and middle-income families owning more than three-quarters of the 529 plan accounts and more than half of total 529 plan investments.”

“Ending the tax-free treatment of college savings plans would hurt low- and middle-income families the most,” he continued, “since the combined impact of the tax increase and the reduction in eligibility for need-based financial aid would wipe out all of the earnings in their college savings plans.”

--Written by John Sandman for MainStreet