Tax Cut Bill Proposes Big Cuts in Student Aid
On November 2, 2017, the Republican-controlled Congress introduced tax-cut legislation that proposes big cuts in tax benefits for college students, among other changes.
The Tax Cuts and Jobs Act would repeal, cut or change several education tax benefits, effective for tax years beginning after December 31, 2017. Of these, the repeal of the student loan interest deduction and the employer-paid tuition assistance are likely to lead to significant pushback from taxpayers.
- Student Loan Interest Deduction. The legislation would repeal this popular above-the-line deduction, which allows low- and middle-income taxpayers to exclude up to $2,500 in interest paid on federal and private student loans, even if they don’t itemize. According to IRS Statistics of Income, 12.4 million taxpayers claimed an average of $1,086 in student loan interest deductions in 2015, reducing their tax bills by about $272 on average and up to a maximum of $625.
- Lifetime Learning Tax Credit. The legislation will repeal the Lifetime Learning Tax Credit, which provides a tax credit of up to $2,000 based on amounts paid for tuition and fees. Graduate students and continuing-education students mainly use the Lifetime Learning Tax Credit.
- American Opportunity Tax Credit. The legislation would increase the number of years of eligible postsecondary education and tax years from four to five, but cuts the tax credit in half during the fifth year. The American Opportunity Tax Credit provides a tax credit of up to $2,500 per year based on amounts paid for tuition and fees and textbooks. The legislation also will require eligible students to be enrolled on at least a half-time basis. The income phase-outs are unchanged, but will subsequently be adjusted annually for inflation.
- Tuition & Fees Deduction. The legislation would repeal the tuition & fees deduction, an above-the-line exclusion from income for up to $4,000 in college tuition and textbook expenses.
- Education Savings Bond Program. The legislation would repeal the education savings bond program, an above-the-line exclusion from income for interest on Series EE U.S. Savings Bonds (issued in 1990 or subsequent years) and all Series I U.S. Savings Bonds if the savings bonds are used to pay for tuition and fees or rolled over into a 529 plan.
- Coverdell Education Savings Accounts. The legislation would disallow new contributions to Coverdell Education Savings Accounts. Instead, the legislation would allow tax-free distributions from 529 college savings plans to pay for up to $10,000 per year in elementary and secondary school tuition.
- 529 College Savings Plans. The legislation would allow 529 plans to be used to pay for books, supplies and equipment for attendance or enrollment in certain apprenticeship programs. Unborn children (children in utero) would be allowed as beneficiaries of 529 plans. (Currently, parents can start saving for a child’s education before birth by opening a 529 plan with the parent as the beneficiary and changing the beneficiary to the child after birth.)
- Death and Disability Discharges. The legislation would exclude from income the cancellation of federal and private student loan debt based on the death or total and permanent disability of the student. Currently, borrowers or their estates receive an IRS Form 1099-C based on the amount of discharged debt, treating the loan cancellation as taxable income.
- Employer-Paid Tuition Assistance. The legislation would repeal the exclusion from income for up to $5,250 in employer-paid educational assistance for tuition and textbooks for employees.
- Teaching and Research Assistantships. The legislation would repeal the exclusion from income for tuition waivers associated with graduate teaching and research assistantships. The tuition waivers would be treated as taxable income. Currently, only the stipend portion of an assistantship is treated as taxable income.
- Tuition Waivers for College Faculty and Staff. The legislation would repeal the exclusion from income for tuition waivers for college faculty and staff and their dependents.
- Excise Tax on Private College Endowments. The legislation will create a new 1.4 percent excise tax on income from the endowments of certain private colleges and universities. The excise tax applies to private colleges and universities with enrollment of at least 500 students with endowment per student of at least $100,000. The excise tax likely would lead to a decrease in college and university spending on student financial aid.
The draft legislation includes a technical flaw in the repeal of the Student Loan Interest Deduction. The student loan interest deduction defines the term qualified education loan. The tax cut legislation does not include a conforming amendment concerning references to qualified education loans in statutory language outside the Internal Revenue Code. For example, the U.S. Bankruptcy Code refers to qualified education loans in the exception to discharge in 11 USC 523(a)(8). It is unclear what happens to the exception to discharge if the student loan interest deduction (and the definition of a qualified education loan) is repealed.
If the legislation passes the U.S. House of Representatives, it will go to the U.S. Senate, which is considering a similar mix of tax cuts. Since the legislation is a budget reconciliation bill, it only requires a majority for passage.