Obama’s Disastrous Proposal to Pay for “Free” Community College By Taxing Savers

Community colleges are great things. They fill a higher education niche that the traditional college system dramatically under serves. In doing so, they provide a quality educational option for a variety of students who may otherwise be unable to pursue a degree. But we don’t need to reinvent the wheel in singing their praises, the White House has already done it for us:

 By 2020, an estimated 35 percent of job openings will require at least a bachelor’s degree and 30 percent will require some college or an associate’s degree. Forty percent of college students are enrolled at one of America’s more than 1,100 community colleges, which offer students affordable tuition, open admission policies, and convenient locations.  They are particularly important for students who are older, working, need remedial classes, or can only take classes part-time. For many students, they offer academic programs and an affordable route to a four-year college degree. They are also uniquely positioned to partner with employers to create tailored training programs to meet economic needs within their communities such as nursing, health information technology, and advanced manufacturing.

They are accessible, affordable and accommodating. When then does President Obama feel the need to fiddle with them, especially at a time when so much of the rest of our higher education is in disarray?

We’ve already detailed a number of issues with the proposal. First, there’s the cost, which will come in at a minimum of $34 billion per year. Second, there’s the untold impact on four-year colleges, which could lose a great deal of market share. Third, if students who would have otherwise gone to a four-year institution opt for community college, then what happens to the population traditionally served by community colleges? Fourth, if the Pell Grant program already offsets community college tuition cost for low income families, then who is the program aimed at helping?

Even if the White House could come up with satisfactory counterpoints to the arguments and questions above there would still be a huge problem with the plan: It’s paid for by taxing 529 College Savings Plans.

These plans work by putting after-tax money into an account where it is able to grow tax free and be withdrawn tax free if, and only if, it is used for college expenses. President Obama’s proposal would impose a tax on the earnings when you take out a money, thereby eliminating any tax incentive for creating the plans. It essentially just turns them into needlessly complicated savings accounts.

Unsurprisingly this has led to some pushback.

“Taxing college savings is detrimental and will have a chilling and resounding effect on the future of college savings, leaving families with an even greater reliance on student loan debt, which is currently at $1.3 trillions,” wrote Betty Lochner, chair of the College Savings Plan Network.

The families Lochner mentions aren’t all wealthy either. Nearly 12 million families have opened a 529 account since their earnings became tax-exempt in 2001. About 10 percent of those accounts were opened by households with annual income below $50,000 and over 70 percent of accounts were opened by households with income below $150,000. Moreover, the financial profile of 529 account holders appears to be trending more towards the middle class as families become increasingly aware of the relatively-new program. TIME Magazine even notes that states are working hard to convince families to invest in a plan, some going so far as to offer matching grants and send brochures home with new parents leaving the hospital.

The White House has attempted – lamely – to respond to questions about how taxing families attempting to save for college helps achieve his goal of affordability.

“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.”

In other words, why should we do the heavy lifting of addressing the exorbitant cost of colleges and universities when we can just send everyone who can’t afford it to community college? Yes, that’s what passes for higher education reforms in this warped White House.