Hold on to your hats because the federal tax bills being debated in Congress may kick up a storm of higher costs for college students, their parents, and those carrying student loans.

The House bill, already passed, poses a far greater risk than the Senate version, because it eliminates almost all existing tax breaks designed to provide some relief from the costs of higher education. In fact, the elimination of higher education tax benefits in the House bill is expected to cost students and parents already struggling to afford college $65 billion over ten years. The Senate bill has not been voted on yet, and in its current form, is less severe.

Here’s what you need to know.

Student Loan Interest Deduction

The House bill eliminates the deduction of interest paid on student loans from taxable income. The Senate bill retains this deduction.

The Current Law:

  • Allows borrowers paying off education loans to deduct up to $2,500 of interest paid on those loans. This translates to a maximum savings of about $625 in taxes each year!
  • Borrowers can take this deduction as long as they are paying off their student loans.
  • The Student Loan Interest deduction can be claimed without itemizing.
  • It’s available to borrowers with a modified adjusted gross income of less than $80,000 ($160,000 for married couples filing jointly).

More than 44 million Americans currently carry a piece of the nation’s $1.4 trillion of student debt. Eliminating this deduction is expected to cost borrowers about $47.5 billion over the next decade.

Tuition and Fees Tax Deduction

The rule permitting a deduction for tuition and fees paid expired in 2016 and neither bill renews it.

Previously, you were allowed to deduct up to $4,000 off your taxable income for qualified tuition and fees.  This benefit was available to those with adjusted gross incomes below $80,000 for single filers ($160,000 for those married, filing jointly).

The Internal Revenue Service reports that more than 1.7 million filers used this deduction in 2014 (the last year for which data is available), deducting an average of almost $2,200 from taxable income. If they were in the 20% bracket, that would have cut their tax bills by more than $400, not an insignificant savings for many families grappling with college costs.

Tax Credits

Rather than lowering your taxable income, Tax Credits provide a dollar-for-dollar reduction in the amount of tax you owe. The House bill eliminates two tax credits for higher education expenses and moderately expands one.  The Senate version retains all three tax credits.

On the chopping block in the House bill is the Lifetime Learning Credit (LLC). Currently, the LLC offsets 20% of the first $10,000 of qualified education expenses, reducing your tax bill by as much as $2,000. It can be used for as many years as you want, but has an adjusted gross income cap of $65,000 for single filers ($131,000 for married couples filing jointly). 

The elimination of the LLC would be an especially hard hit to graduate students, workers who need retraining, part-time students, and nontraditional undergrads who take more than four years to graduate.

Also being eliminated in the House bill is The Hope Scholarship Credit, a cut that will not have as much impact since it has largely been replaced in recent years by the American Opportunity Tax Credit (AOTC).   

Under the House bill, the only higher education tax credit to remain in place would be the AOTC. Currently the AOTC allows a tax credit of up to $2,500 on qualified tuition, fees, books, and supplies. Part of the AOTC is “refundable,” which means, even if you do not owe any federal taxes, you can receive up to a $1,000 refund. Under the House bill the AOTC will be expanded to allow for half the credit for the fifth year of college, up to $1,250 (up to $500 being refundable).  You are eligible for the AOTC if you earn below $90,000 as a single filer ($180,000 if married, filing jointly).

More than 10 million filers take advantage of these education tax credits cutting their tax bills by an average of $1,700. The House bill’s cuts in higher education tax credits is expected to cost college students and parents $17.3 billion over the next decade.

Employer Higher Education Assistance

The House bill eliminates tax-free tuition reimbursement from employers, and eliminates the tax break available to employers who help workers pay off their student loans. The Senate version retains these benefits.

Current law allows you to take up to $5,250 per year in tax-free employer undergraduate tuition reimbursements ($8,000 per year for graduate studies) but under the House bill, these benefits become taxable income.  

More than 60% of employers offer some sort of tuition assistance and roughly 1 million students are taking advantage of the program.  About 20% of students over age 40 receive financial backing from their employers.

Currently, employers are allowed a business-related tax credit for paying up to $500 per month towards an employee’s student loan debt. Currently about 5% of companies are paying about $50 to $100 per month towards the principle on employees’ student loans. This amount of assistance can help a borrower with $35,000 of debt shave about 2.5 years off the standard 10-year repayment period and save serious money.  

University Employee Benefits

The House bill would eliminate free tuition benefits for university employees, their families, and graduate students working for the university in assistantships. The Senate bill retains these benefits.

 Currently colleges may waive tuition for their employees and their families, but under the House bill, colleges would have to count waived tuition as the employee’s taxable income.

A New Tax on College Endowments

Both bills initiate a new tax on private colleges and universities with endowments of at least $50 million.

 Endowments are the assets donated to colleges and universities invested in order to produce an income that can be used for research, financial aid, community service, or other operating expenses.

Under both bills, private universities with at least 500 students and assets of more than $250,000 per student would face a new 1.4% excise tax on investment returns. About 70 of the wealthiest colleges with very large endowments would be affected.

Wealthy universities have been criticized for raising tuition far in excess of inflation while sitting on hefty endowments, but schools argue endowments are not savings accounts that can easily be drawn down. Many donors direct their contributions to be used for specific purposes, making large portions of endowments not an available slush fund.

And, in general, the wealthiest universities are the ones that have the strongest records on financial aid. And the new tax doesn’t address college affordability—it redirects money to the federal government that would have been spent on students, faculty, programming, and campuses.

 Other Changes

Other changes included in the House bill which are less likely to affect the majority of students and parents.  The Senate version makes no mention of these:

 College Savings Plans

The House bill eliminates Coverdell Savings Accounts and changes 529 rules.

 Currently the Coverdell program allows families to save up to $2,000 annually per child in after-tax dollars in a tax-protected savings account. The money can be used for college tuition, tuition at private K-12 schools, or for other education expenses such as tutoring or books. The House tax bill ends all contributions to Coverdell savings accounts and requires that existing funds be transferred to a 529 plan. 

529 college savings accounts are offered by states and permit contributions of up to $14,000 annually. Their earnings are tax-deferred, and withdrawals are not subject to federal taxes if the money is used for qualified higher education expenses. This doesn’t change, but the House bill will allow withdrawals for apprenticeship programs, and for up to $10,000 annually towards K – 12 school expenses, a benefit to wealthier families paying high tuition for private K-12 education.

Federal Student Loan Discharge

The House bill eliminates federal income tax on federal student loans discharged due to death or disability.

 Cheers on this one!

Public Service Loan Forgiveness

On another note, the Public Service Loan Forgiveness Program forgives the remaining balance on Federal Direct Student Loans after 120 consecutive payments (10 years) for borrowers working full-time in public service occupations such as education, government, and non-profits.  While this program is not axed in either tax bill, eliminating it (thereby increasing federal revenue) is part of the conversation on the federal budget. More than 500,000 borrowers are enrolled in the program, and eliminating it along with the tax benefits discussed in this article, would deal a harsh blow.

The Upshot

The tax bill debate is underway and neither version is likely to survive as is. However, if the final version keeps the severe cuts to higher education benefits as written in the House bill, college will become less affordable for most families already struggling to meet those costs. House tax bill proponents admittedly hope college students and their parents will contribute an extra $47.5 billion in federal revenue through eliminating the student loan interest deduction, free tuition for university employees, and employer education assistance alone. 

The American Association of State Colleges and Universities said of the House Bill, “These changes together would make college less affordable for the vast majority of students who access higher education through public colleges and universities.”

The American Council on Education says the “House tax reform proposal released today would discourage participation in postsecondary education, make college more expensive for those who do enroll, and undermine the financial stability of public and private, two-year and four-year colleges and universities.”

The nation’s debt for higher education is already in the trillions and climbing steadily. It’s a tremendous burden for young adults who struggle to make their payments, and increasingly threatens the financial security of millions of parents approaching retirement age. Tax benefits, now on the chopping block, were a small but important effort to lessen this burden and make college costs a little more manageable for the vast majority of students and parents.


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