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Students Breathe Easy on Tax Bill but Other Battles Loom

Dec. 20, 2017
Loans, Student Loans, Taxes
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College students and people with education debt can breathe a sigh of relief, mostly: The tax bill now being sent to President Trump preserves the student loan interest deduction and does not include a provision that would have taxed graduate student tuition waivers.

“I think that students and families really did dodge a bullet,” says Steven Bloom, director of government relations at the American Council on Education, which represents college and university presidents. “The final tax bill is, thankfully, a lot better than the earlier versions in that it will preserve a lot of provisions that are important to students and families.”

But students aren’t in the clear yet. Congress is preparing legislation to overhaul the federal student aid system, meaning there’s another crucial political battle looming that could have big consequences for students.

Here’s where students will stand under the new tax rules, and what they should watch out for as Congress debates more higher-education changes.

Where students will stand after tax revision

Most of the changes that were passed will go into effect for the 2018 tax year, on returns due in April 2019. Once revisions are in place, here’s where students will stand:

Graduate assistants and other university employees

Tuition waivers for graduate assistants and other university employees remain untaxed. Graduate and Ph.D. students who receive free or reduced tuition would have had to pay income taxes on the amount of their tuition benefit under the House bill. Graduate tuition can exceed $50,000 per year at some schools.

Student loan borrowers

The new rules keep the student loan interest deduction, which allows taxpayers to shave up to $2,500 off their taxable income, a savings of $625 for someone in the 25% tax bracket. In 2015, the average student loan interest deduction was nearly $1,100, worth about $270 to someone in the 25% bracket, according to NerdWallet’s analysis of IRS data.

The student loan interest deduction is an above-the-line deduction, meaning taxpayers don’t need to itemize to claim it. They can benefit from both the student loan interest deduction and the increased standard deduction, which rises from $6,350 to $12,000 for individual filers.

College students and their parents

Tax benefits for college students — or their parents, if the parents pay — remain in the tax rules. They include the American Opportunity Tax Credit, Lifetime Learning Credit, deduction for qualified tuition expenses, and tax exclusion for employer-provided education assistance.

Dead and disabled student loan borrowers

The new rules remove a tax on student loans forgiven if a student dies or is permanently disabled. Until now, the forgiven amount was taxed as income.

Colleges and universities

While college students and education loan borrowers likely come out ahead, critics worry the new tax rules will reduce funding for colleges and universities and make higher education even more expensive for students.

A new excise tax on some college and university endowments means there will be fewer dollars available for scholarships, student services and other expenses, John Walda, president of the National Association of College and University Business Officers, said in a statement. Critics also fear that the increased standard deduction will discourage charitable giving to colleges and universities, and changes to the state and local tax deduction could harm state-funded education.

More potential changes loom

Meanwhile, the House has begun reauthorizing the Higher Education Act, which governs federal financial-aid programs and is overdue for review. The reauthorization bill, known as the Promoting Real Opportunity, Success and Prosperity through Education Reform (PROSPER) Act, cleared the House education committee earlier in December.

The bill would pare down several existing grant and loan programs to the Pell Grant and a single federal ONE Loan program. Other provisions would eliminate origination fees for federal student loans, simplify the Free Application for Federal Student Aid, known as the FAFSA, and add a $300 Pell Grant bonus for students who take at least 15 credits per semester.

But the bill also includes proposals to eliminate Public Service Loan Forgiveness for loans made under the ONE Loan program, repeal rules designed to protect students from unscrupulous for-profit colleges, and eliminate subsidies for student loans that cover the cost of interest while students are in school.

The bill’s backers say it will simplify federal financial aid programs, promote college completion, remove outdated government requirements and help train students for the country’s 6 million unfilled jobs. Critics warn that the legislation benefits private lenders and for-profit colleges instead of students and people with student debt.

But student loan borrowers shouldn’t panic about PROSPER yet, says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.

“Nobody thinks this bill is going to pass anytime soon,” she says, adding that progress on the bill could get pushed to 2019, after the midterm elections. “This is by no means a done deal.”

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