The tax code contains a number of provisions that together functions as a kind of “three-legged stool” intended to advance three important goals:
- help students and families pay for college;
- assist with the repayment of student loans; and
- encourage saving for higher education.
This framework serves the needs of low- and middle-income students and families as they invest in themselves and in higher education. Unfortunately, the Tax Cuts and Jobs Act would make substantial cuts to the education provisions as currently written in the tax code.
Help students and families pay for college
The House tax bill would repeal the Lifetime Learning Credit (LLC) and the Hope Scholarship Credit, while slightly expanding the American Opportunity Tax Credit (AOTC) to a fifth year (and at half the value). It would also repeal the Student Loan Interest Deduction (SLID) and Sec.117 (d)(5). If these provisions remain in the bill, graduate students and lifelong learners would no longer qualify for these education deductions and tax exemption for tuition waivers for graduate students would be taken away.
The Senate bill, as currently written, preserves these education provisions.
American Opportunity Tax Credit
The AOTC is a partially refundable tax credit of up to $2,500 (with up to $1,000 refunded to filers with no tax liability) toward eligible education expenses for the first four years of college that begins to phase out for individual taxpayers at $80,000 of income ($160,000 for joint filers).
Lifetime Learning Credit
Under this nonrefundable tax credit, taxpayers can claim up to 20 percent of their first $10,000—for a maximum of $2,000, which is not indexed for inflation—of qualified tuition and related expenses paid during each calendar year. The LLC is available for all years of postsecondary education, and there is no limit on the number of years it can be claimed.
The above-the-line deduction for qualified tuition and related expenses permits taxpayers to deduct up to $4,000 per year in qualified higher education expenses from their taxable income. The tuition deduction is particularly beneficial to graduate students who are ineligible for the AOTC. The deduction expired at the end of 2016.
The Student FICA Exemption
Enacted in 1935, this provision supports college students who work on campus by exempting them from paying FICA (Social Security and Medicare) taxes.
Tuition waivers (Section 117(d)(5))
This exemption reduces the cost of graduate education and mitigates the tax liability of graduate students teaching and researching as part of their academic programs, many of whom earn very little and increasingly finance their own graduate educations.
Assist with the repayment of student loans
As written, the House bill also would repeal the Student Loan Interest Deduction (SLID). In 2014, 12 million taxpayers benefitted from SLID, 7 million more than in 2011. The Senate bill would preserve SLID.
Student Loan Interest Deduction (SLID)
SLID currently permits taxpayers with less than $75,000 of income ($155,000 for joint filers) to deduct up to $2,500 in federal student loan interest payments each year. The current $2,500 interest limit has been in place since 1997.
Exclusion of Discharge of Student Loan Debt
The current tax code provides an exclusion for student loan debt that is forgiven for individuals who worked for a specified time period in certain professions or for a class of employers. This tax exclusion applies to several federal and state loan forgiveness initiatives, including the Public Service Loan Forgiveness program for borrowers working in government and certain nonprofit jobs, the TEACH program to assist future teachers, and the National Health Services Corps Loan Repayment Program.
Encourage saving for higher education
Section 529 Education Savings Plans and Coverdell Education Savings Accounts
According to Treasury Department, Section 529 Education Savings Plans
and Coverdell Education Savings Accounts offer “an attractive and
convenient means of saving for college that offer substantial tax
benefits.” This long-term planning helps reduce student debt and allows
governments and institutions to better target scarce student aid funds
to those without the means to save.
What’s at Stake:
Over the past two decades, provisions in the tax code, including various higher education credits, the student loan interest deduction, and tuition waivers, have played an increasingly significant role in helping low- and middle-income students and families finance higher education. During tax reform, we urge Congress to oppose provisions that would repeal or weaken these important tax benefits for students and families. .