Most of the news coming out on how the new tax bill affects families and colleges has been fragmented and tainted with political bias. This an attempt to provide a bottom line and more objective look at how the final bill will affect college families and colleges.
EFFECT ON COLLEGE FAMILIES
On balance, the lobbying efforts from colleges, universities, graduate students, and families has resulted in a tax bill that is mostly good news for most college families.
Keeps the student loan interest tax deduction
The final bill keeps student loan interest tax deductible even for students who don’t itemize. It does, however, limit the amount of interest that can be deducted to $2,500 per year, and it is not applicable to single taxpayers making more than $80,000 per year and families earning more than $160,000 per year.
Allows 529 distributions to be used to pay for tuition of up to $10,000 per year for private K-12 education
Though this benefit has always been available for families saving for college in Coverdell accounts, the new tax bill now makes it available for families with 529s also. Though public schools see this concession as problematic for them, it is good news for college families.
Keeps the Lifetime Learning Tax Credit
This is good news for graduate students. Though no longer eligible for the AOTC tax credit, students can use the $2,000 Lifetime Learning Tax Credit during their years in graduate school.
Eliminates the proposed tax on tuition waivers and/or tuition discounts for graduate students
When the house bill originally proposed taxing tuition waivers for graduate students, there was a lot of protest from students. The final bill will not tax these waivers. This is also good news for employees of colleges whose kids also benefit from large tuition discounts.
Ends the tax on student loan forgiveness for reasons of death or disability
Though not getting a lot of publicity, the practice of taxing student loan forgiveness should have been rescinded a long time ago. We’ll get a lot more news about student loan forgiveness when Congress reauthorizes the Higher Education Act (HEA).
EFFECT ON COLLEGES
The news is more mixed regarding how the tax law will benefit colleges and universities. The news also demonstrates the power of the higher education lobby to eliminate or, at least, modify the house’s original proposals.
Rescinds the proposal that would not have allowed colleges to use tax-free bonds to fund construction projects
This is obviously good news for colleges and universities that depend on these tax-free bonds to fund their various projects. The bad news, however, is they will no longer be able to use this method to pay off existing debt.
Rescinds the proposed increase in the taxes that colleges pay for unrelated business income
Though this is not a major source of income for colleges, it is at least helpful to most colleges and universities.
Limits the proposed 1.4% excise tax on all colleges to about 30 elite universities
The proposed excise tax on endowments now only applies to universities with endowments that are equal to $500,000 or more per student. This limitation means that the tax will only apply to about 30 universities.
The cost to colleges is minimal compared to the original proposals, so we do not expect a significant change in the generous financial aid distributions that elite colleges already provide to families with demonstrated financial need.
THE CURRENT LANDSCAPE AND OUTLOOK
Tax bills and their potential impact on students, families, and schools are always fraught with uncertainty until the legislation is passed and signed. In this case, there is much for students, families, and schools to be happy about. The outcome also demonstrates the impact that speaking up and contacting Congressional representatives about issues that matter can have. We’re all hopeful that the new and existing parts of the tax bill related to post-secondary education will have a positive effect on students and the colleges and universities that serve them.