Legislation

Tax Incentives: what incentives exist for higher education?

Tax advantages for saving, tax advantages for tuition and associated costs, and tax advantages for student loans are some of the federal tax incentives for higher education.

These advantages apply both before and after students enroll in college. These incentives primarily go after middle-class families who do not receive many federal student grant programs.

There are two main ways that the federal government helps people pay for their higher education costs: traditional student aid and tax advantages. College students and their parents are eligible for more than a dozen tax benefits.

There are three main categories of them: tax credits for tuition and related expenses, tax deductions for tuition and fees, and student loan repayments. Special tax treatment for education savings plans is one of these.

These tax breaks are expected to cost the federal government $131.4 billion between 2019 and 2022, according to the Joint Committee on Taxation.

The middle class often receives tax benefits for higher education instead of the poorest households, who gain more from traditional student aid. The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) are the biggest advantages.

Despite the fact that the AOTC is refundable, both credits primarily benefit middle-class households because their out-of-pocket costs for higher education are typically higher than those of lower-income households, who are eligible for traditional aid.

According to the Congressional Budget Office, middle- and upper-class families gain from nearly all other tax benefits for higher education. The refundable earned income tax credit, which mainly benefits taxpayers in the bottom two quintiles, has one exception that lets dependents who are in college qualify as children.

How did the Tax Cut and Jobs Act affect this?

The Tax Cuts and Jobs Act (TCJA) did not materially alter the tax advantages for saving for or repaying student loans. It also prevented modifications to the LLC and AOTC. The legislation did, however, significantly alter the way tax benefits are structured for people who are claiming a dependent college student.

Prior to this year, dependents over the age of 18 could only be claimed if the taxpayer’s gross income was below a certain threshold. However, parents were not subject to the gross income test when claiming full-time students between the ages of 19 and 23.

For each college student aged 19 to 23 claimed as a dependent, taxpayers received an extra $4,050 in personal exemption in 2017.

The Tax Cuts and Jobs Act did away with all personal exemptions, but it also increased the child tax credit by adding a $500 nonrefundable credit for dependents who weren’t qualified for the standard credit, including dependent college students who were 19 to 23 years old.

This modification changed the tax benefit of designating a dependent college student from one that was dependent on the tax rate of the parents to a credit where all taxpayers receive an equal benefit regardless of their tax rate.

As a result, lower-income taxpayers receive a larger portion of the benefit’s value from higher-income taxpayers. The nonrefundable nature of the new credit, however, means that it still does not apply to those with the lowest incomes.


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