President Barack Obama's proposal this week to roll back tax benefits for so-called 529 plans exposes a fundamental disagreement about who is benefiting from these state-sponsored college savings plans.

529 plans are sponsored by states and run by investment management companies. Withdrawals from the accounts can be used tax-free to pay for qualified education expenses at any college or university in the country, such as tuition, fees and books.

Supporters of Obama's proposal point to a 2012 government report showing the plans being used by less than 3 percent of all U.S. families and that these families tended to be much wealthier than those without 529 accounts.

The Government Accountability Office report also estimated that 47 percent of those with 529 plans had incomes over $150,000, while their median assets of $413,000 were 25 times higher than the median of $15,400 in assets for families without the plans.

Opponents of Obama's proposal, however, portray the plans as popular among middle-class families. The College Savings Foundation, a nonprofit that advocates for the plans, believes the 47 percent figure is too high and does not reflect recent growth in the plans, which now boast about 12 million accounts and an estimated $244 billion in assets.

Based on a 2014 survey conducted by Strategic Insight, a mutual fund research company, the foundation believes rather that 70 percent of account holders have incomes under $150,000.

She notes that the GAO's 3 percent figure included the vast majority of households who do not have children under 18. Indeed, among the 25 percent of families with minor children, 7 percent had a 529 or Coverdell in 2010, according to the GAO.

The foundation believes that has grown to 15 percent based on the current number of accounts.

The average 529 account balance is around $20,000 - far less than you would expect if 529s were only a tool for the rich, said Mary Morris, the foundation's chair and CEO of the country's largest 529, the Virginia529 College Savings Plan.

"529s are for the families who are not going to get direct aid, free money, grants," Morris said. "That's a great big group that's going to struggle to pay for college."

Changing the rules to tax 529 withdrawals as Obama has proposed would likely cause many families to quit saving altogether, leading to more student loan debt, according to Morris.

"If you want to encourage education, I don't think you take back an incentive for saving," she said.

Rich Benefits

A closer look reveals that 529s clearly have outsized benefits for wealthy families who reap bigger tax breaks and potential estate planning advantages from the plans.

Congress fueled 529 plan growth in 2001 by making withdrawals from the plans tax free so long as the money was used to pay qualified higher education expenses. That temporary tax break was made permanent in 2006, but it is the one Obama wants to repeal.

Most states also offer tax deductions, matching grants or other benefits to families who contribute.

The tax benefit grows with a family's income tax bracket. A 2009 Treasury Department analysis found that compared to saving in a taxable account over a 15-year period, saving in a 529 with a state tax deduction would result in 22 percent more money for a low-income family, 35 percent more for a middle-income family and 39 percent more for a wealthy family.

The plans also offer unique gift and estate-planning benefits. According to federal gift tax rules, each person can give any other person $14,000 a year without having to file a gift tax return - something that's known as the gift tax exclusion. But with 529 plans, givers can contribute five years' worth of gift tax exclusions at once, or $70,000. A couple could give $140,000 per child.

Most plans have high limits on total contributions, ranging from $235,000 to $400,000, depending on the state. Gifts larger than the exclusion amounts require filing a gift tax return, but do not actually trigger gift taxes until the contributor gives away more than $5 million in a lifetime.

The Obamas are among the families to have taken advantage of the ability to "front load" contributions. According to their 2008 tax return, the couple contributed $120,000 each to accounts for their daughters Malia and Sasha for a total of $240,000. (Note: the gift tax exclusion was $12,000 back then.)

While that may seem like a lot of money, the average sticker price for one year of private college currently exceeds $40,000, and elite schools charge about $60,000.

But in five years, when Sasha turns 18, four years at a private college are expected to retail for more than $200,000 while an education at an elite school is projected to cost more than $300,000, according to, a 529 planning site.