[Obama’s] proposal is to tax earnings on 529 plans, college investment accounts that grow federal and often state income tax-free. Essentially, families currently avoid paying a capital gains tax on money used for education. The president wants to change this rule so that the earnings would incur an income tax. So if a family saved up about $4,000 to pay for college and the growth was $1,000, the student would have to pay income tax on $1,000. The average 529 plan account holder’s account holds just under $21,000, according to the College Savings Plan Network, the organization that represents state treasurers. That amount could be accumulated by depositing just under $60 per month for 18 years. The student who’s parents sacrificed just save $60 per month could owe taxes on nearly half the total value of the account.

While it’s unlikely the proposal will pass congress, College Savings Plans Network Chair Betty Lochner is concerned the proposal will scare families away from saving for college. “I’m just concerned about the misinformed buzz this creates that families may get taxed on their contributions,” she says. We’re getting into dangerous territory when national college savings are already less than a quarter of the national federal student loan debt totals, she says.

“I was very surprised by the Obama 529 proposal because in many ways it is anti-middle class for families trying to afford college,” said Joe Hurley, founder of the SavingforCollege.com website. “And so much of the emphasis in the Obama administration has been pro-middle class.”

But some experts said 529 plans, which are used by seven million families and hold $217 billion, disproportionately benefit the most affluent families, which can afford to save. More than 12 million accounts are in circulation, according to Strategic Insight, an investment consultant that tracks the industry. If more affluent families can afford to start saving early and often, the compounding over time enables them to avoid paying more taxes, especially those in higher tax brackets.

“They primarily provide a subsidy to people who would save in other forms anyway,” said Sandy Baum, a senior fellow at the Urban Institute…

Even if many middle-income families save in 529 plans, an administration official, referring to the Federal Reserve’s Survey of Consumer Finances, said that more than 70 percent of the account balances for 529 plans and another option known as Coverdell Education Savings Accounts are held by families with incomes over $200,000.

Obama’s proposal would hit some families that earn below the quarter-million-dollar mark. It’s also still a great idea. Unless, that is, you’re really determined to subsidize college tuition for families with six-figure incomes so they can send their kids to Amherst or Brown…

Under his proposal, investments could still grow tax-free. But when families retrieve their money, the gains will be taxed as ordinary income. As the Wall Street Journal notes, this is how 529 plans worked in the 1990s, until the Bush tax cuts made them even more generous…

I don’t know about you, but I generally don’t think that our higher education policy should be geared toward helping families that earned $150,000 or more send their kid to the most expensive possible school. Meanwhile, the White House says that revenue brought in from taxing gains in 529 plans would go toward expanding other higher education tax breaks, such as the American Opportunity Tax Credit, which is available to families earning up to $180,000. So it seems like the middle class makes out just fine in this deal.

Slightly over half of all the college-saving accounts are held by Americans making under $150,000 a year, according to a 2012 Government Accountability Office report. About 30% earned under $100,000 a year. There are about 12 million 529 accounts in total, according to the College Savings Plan Network, an industry group, while the average balance in a 529 account is about $21,000—enough to cover almost two years average tuition, room and board—minus aid—at a public four-year university…

“This idea that this is an account for the preserve of the Huxtables out there that make $250,000 a year is kind of ridiculous,” Mr. Ellis said. Many owners of 529 plans are young parents who take pride in saving money in advance for their children’s college education, he said. “You’ve made them look like chumps for saving whatever they’ve saved so far.”…

“What these accounts are designed for is the middle-income families that can’t afford to pay as you go and aren’t going to get need-based aid,” said Betty Lochner, head of the College Savings Plan Network. “It doesn’t make any sense to” take away the incentive to save, she said. Ultimately, many families would have to borrow more to cover expenses without the 529 tax break, she said.

“People don’t care that a wealthy person might also own a 529 plan. People care that they own a 529 plan, and that Obama is seeking to tax it out of practical existence,” Ryan Ellis, tax policy director for the conservative think tank Americans for Tax Reform, wrote in Forbes this week…

“This would eliminate all new investment in 529 plans,”said Mark Kantrowitz, publisher of Edvisors.com, a financial aid Web site. He noted that Obama’s proposal would treat the earnings on 529 plans as student income, which would hurt a child’s chances of receiving financial aid.

“When you take into account not just the impact on taxes, but also the impact on financial aid, it wipes out all of the earnings,” Kantrowitz said. “You’d be better off in a way just putting the money in a mattress, than using one of these plans.”

The overall net tax reduction for education would be $50 billion for middle-class families. But that won’t settle the argument, since there’s no consensus on what qualifies as a middle-class family in the first place.

Families earning $200,000 are in the top 5 percent of all American earners. But many of them, especially in the high-cost, high-tax states on the East and West Coasts, do not feel very affluent. And because such families are comparatively influential politically, especially with Democratic lawmakers representing those states, prospects for the 529 changes appear dim.

[T]he very fact that we are discussing taxation of educational savings — redistributing educational subsidies downward — indicates that the administration has started scraping the bottom of the barrel when seeking out money to fund new programs. Why target a tax benefit that goes to a lot of your supporters (and donors), that tickles one of the sweetest spots in American politics (subsidizing higher education), and that will hit a lot of people who make less than the $250,000 a year that has become the administration’s de facto definition of “rich”? 

Presumably, because you’re running out of other places to get the money. The top tax rate on people who make more than $413,000 ($464,000 for married couples) is already almost 40 percent. That’s on top of Medicare taxes (2.9 percent, not capped), Social Security taxes, state and local taxes (in a deep blue area like New York City, these can amount to 10 percent, though you get some of that back by deducting state taxes from your federal tax) — a marginal tax rate of around 45 to 50 percent in blue states, and possibly even more if you run a business.

Capital gains are taxed at a lower rate, of course. But if you combine the Obamacare capital income surcharge for higher earners, and the administration’s new proposal to raise the base rate to 28 percent, you’re looking at a capital gains tax of almost 32 percent for people who make more than $200,000 a year ($250,000 for married couples). We are simply running out of room to pay for generous new programs with higher taxes on the small handful of people who make many hundreds of thousands of dollars a year. I’m not saying that it’s impossible, politically or otherwise, to further raise their tax rates. I’m just saying that there’s not all that much money there left to get. 

The College Board says the average cost of tuition, fees, room and board at a private four-year nonprofit college this year is more than $42,000. So we’re supposed to believe the President is sticking it to fat cats when he targets savings plans that might cover one semester at a private college, or a full year for in-state students at public universities. This now makes you a Rockefeller on Planet Obama…

Liberals are particularly annoyed that, depending on the state, 529s can allow people to save $300,000 or more for education. But maybe parents and relatives wouldn’t have to save so much if federal subsidies weren’t driving the cost of college to such heights. Again this year higher education costs are increasing faster than inflation, as they have for decades…

One more time the Administration is using the political cover of “middle class” to disguise a transfer of power from the middle class to government.

The economics component of the president’s plan, like the education part of it, fails. In current dollars, the cost of college exceeded $9,000 a year a half century ago. Today, it exceeds $20,000 a year. The spike coincided with an unprecedented slew of financial-aid programs designed to make higher education more affordable. Instead, the subsidies allowed schools to increase tuition and other costs knowing that the government would make up the difference. Past evidence of the influence of subsidies on costs suggests a similar outcome here.

Ultimately, providing an inferior product for free undercuts institutions that more effectively serve students. Surely if the president provided vouchers for free Happy Meals it would enable some who don’t eat much to eat more. But the primary effects would be to put out of business those who provide healthier fare and undermine the wellness of most of the voucher recipients.

All colleges will be competing for federal dollars earmarked for the 100 percent subsidized program. Whether the funds are dealt out directly from the federal government or allocated to the states, who in turn allocate to individual colleges, it stands to reason that a key method to obtaining more federal funding is to prove that your college has higher enrollments for students that qualify for the program…

Not only will the cost to taxpayers increase, but the growth in enrollment from students who are not personally financially invested in their own success will use up precious educational resources, only to drop out. This is likely cancel out any economic gains from the “investment” made in students who use the system wisely. Meaning, the likelihood that the taxpayer will receive any sort of net economic benefit from a more college-educated population is slim to none…

Grade inflation and enrollment inflation caused by converting community college to an entitlement will produce a high school graduating cohort that is ill-equipped for college work and weighed down by a less-motivated group of junior college entrants…

Community college can be a smart short-term investment for many individuals, maybe even worth going into debt for. But when personal investments are converted to universal entitlements, quality declines for everyone while the tax increases are a burden they will pay for a lifetime.

You’ve gotten to the point now where the first two years of college used to be what you came out of high school with.  And now you throw this whole free community college thing in there.  Why is that even an issue?  You know why that’s an issue?  Is because college itself, not junior college, but major institution of higher learning college, the tuition is exorbitant.  We’re getting to the point we need education care to send kids to college much like you need health care to go to the doctor.  It’s flat-out absurd. 

And you’ll note, the president never, ever chastises Big Education. Never demands they lower prices.  The president and the Democrats will chastise Walmart all day long and they’ll chastise ExxonMobil all day long and they’ll get all over the cable companies, and they’ll get all over the telephone companies.  Their enemies list is one industry after the other, drugs, pharmaceutical, but Big Education can raise their prices, it doesn’t matter how much, and all we get is Obama and the Democrats launching new programs, student loans, student this, free community college in order for people to be able to access it and afford it.

And why is this the case?  It’s because the citadel of education is where the American left is.  They own it.  And there’s not gonna be a serious move at reducing salaries for these professors, these communists and socialists that are teaching your kids. And that’s why there’s not gonna be any serious alteration to what’s happening to college athletics because of the money. 

White House Press Secretary Josh Earnest said Friday that middle-class families concerned about President Obama’s plan to raise taxes on their college savings should just send their children to community college…

Asked to “square” Obama’s State of the Union claim that he wanted to make college more affordable for middle-class families with his 529 tax hike, Earnest said, “The reforms the president has proposed for the 529 program are reforms that he would consider only in the context of the other education reforms that he put forward.”

“And there are a variety of proposals the president put forward,” Earnest continued, “some related to the tax code, but some also related to the president’s proposal to make community college free for hard working students that are getting good grades. That would have the benefit of essentially cutting the cost of a four year education in half. If you can do the first two year at a community college and have them paid for then the next to years are something you can pay for and essentially your tuition costs have been cut in half.”