I am off this week but thought this analysis of the education impact of the newly adopted federal tax code was worth sharing. It provides a succinct summary of some of the changes related to education.
The author is Fred Amrein, developer of EFC PLUS, software that projects the financial outcome of a college based on a family’s finance, and author of “Financial Aid and Beyond: Secrets to College Affordability.”
By Fred Amrein
Yesterday, both Houses of Congress passed the new tax bill, which is the first major change to the tax code in 30 years. The new Tax Cut and Job Act will have a significant impact on education funding. The main objective of the bill is to lower taxes and simplify the process.
Over the past few months, numerous proposals were changed or added to the bill. All of these changes will affect multiple areas of educational funding. Listed below are the final approved areas that we have identified. Some of the items may have a direct or indirect impact on college funding and student loan repayment.
College Funding Items
•529 Plans – They can now be used for K-12 education cost up to $10,000 per child. This could be very helpful for people who live in states that offer a tax deduction for contribution to a 529 plan.
•American Opportunity Credit – This tax credit remains at $2,500 per child per year with qualified college expenses. There are income limits based on the tax filing status.
•College Tuition Benefit will remain untaxed. – Initial change was to make it taxable. It is still considered an outside resource for need-based financial aid determination.
•Company Tuition Reimbursement will still be tax-free up to $5,250. Initially planned to be eliminated but was added back in.
•Coverdell Saving Plans – Initially listed to be eliminated especially after the 529 expansion. The Coverdell will remain the same.
•Graduate School Scholarships – There is no change in the final bill. This too was listed as a change in the initial bill but will remain the same as current law.
•Hope Scholarship and Lifetime Learning Credit – The original bill planned to eliminate both of these income tax credits but they will remain the same. The goal was to have only one educational tax credit. This credit helps specific tax filers who were part-time students and graduate students.
•Student Loan Deduction – This is still an allowable deduction in the final bill. The original bill eliminated this deduction. There are limitations based on how you file your taxes.
•Student Loan Discharge due to Death and Disability will be tax exempted – Prior to this bill these types of student loans forgiveness were taxable. This will remain in place but will be sunset in 2025. Other Income Drive Repayment Loan forgiveness such as IBR, PAYE, REPAY are still taxable forgiveness. Public Service Loan Forgiveness is tax-free. Changes in these plans will be addressed in the Higher Education Act being reviewed now.
Indirect Tax Items Affect Educational Funding
•Elimination of Exemptions – With the elimination of the exemption deduction and an increase in the standard deduction, more analysis will be required to maximize the American Opportunity Credit and other educational tax credits.
•Home Equity Loan interest is no longer deductible. A common borrowing option was to use the home equity lines of credit or loans as a source for college funding. Under the new bill, only your primary mortgage interest will be deductible.
•Kiddie Tax Rule Change – Under the current law, unearned income over $2,100 for certain dependent child are taxed at the parent rates. Under the new Kiddie Tax Rules, this income will be taxed at the trust level income tax rate, which are normally higher than many parent rates.
•Lower Tax Rates and Federal Income Tax paid may affect your Expected Family Contribution number. – The new tax bill has multiple changes to the amount of federal tax paid. The amount of federal tax paid is part of the Expected Family Contribution or EFC calculation.
•Minimum Tax (AMT) Remains – An initial goal was to simplify the tax code and the AMT is a big factor. The income limits were raised but is still part of the new tax bill. The AMT is a problem specifically for couples who are in Income Drive Loan Repayment methods.
•Other Varies Tax Changes could affect state educational funding and highly endowed colleges. These reductions could raise costs at some institutions.
In 2018, the college funding and student loan repayment process will be changing, significantly. This article address only the initial changes in the tax code. Additional changes are being addressed in the Higher Education Act, which is called Prosper Act. Once both are passed and signed, we will be able see the full impact on college funding and student loan repayment.