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Obama Administration Won't Seek To End 529 College Tax Break

Reversing what had been an unpopular approach, the White House says it is dropping the idea of ending a tax break for 529 college savings plans. Critics had called the proposal a tax hike. All 50 states and the District of Columbia sponsor 529 plans.

Money in 529 accounts is meant to grow along with future college students, and then be distributed to pay for education expenses without being taxed.

As NPR's Tamara Keith reported this morning, "It's a pretty good deal, and one that's been around since 2001. But the White House says fewer than 3 percent of families use these accounts — and 70 percent of the money in them comes from families earning more than $200,000 a year."

Obama's plan had been to end the tax benefit for future contributions, replacing it with other education and tax proposals. But the idea drew bipartisan criticism, and the White House said today that it will now ask Congress to focus on "a larger package of education tax relief that has bipartisan support" — referring to proposals the president mentioned in his State of the Union speech.

NPR's Keith confirmed the reversal Tuesday. The New York Times reported the news today, saying that the president was "facing angry reprisals from parents and from lawmakers of both parties."

The move comes a day after Rep. Lynn Jenkins, R-Kan., introduced a bill that would expand college savings plans instead of limiting them.

Today, Jenkins said her bill would "further promote college access and eliminate barriers for middle class families to save and plan ahead. It would also modernize the program by allowing students to purchase a computer using their 529 funds."

House Speaker John Boehner, who had urged Obama to keep the 529 plans intact, says he's glad the president "listened to the American people and withdrew his proposed tax hike on college savings." He added, "This tax would have hurt middle-class families already struggling to get ahead."

Aides familiar with the conversations tell NPR's Keith that House Minority Leader Nancy Pelosi urged preserving the 529 provisions today, as she traveled with the president on Air Force One from India to Saudi Arabia.

You can read about 529 plans at the SEC website, as well as at the IRS site.

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Bill Chappell is a writer and editor on the News Desk in the heart of NPR's newsroom in Washington, D.C.