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Tax-cut Deal Contains Higher Ed Benefits

The hotly debated tax deal negotiated by President Barack Obama and congressional Republicans and approved by Congress has several little-recognized goodies for higher education, namely in the form of tax credits that help students and their families pay for college.

Included in the bill, H.R. 4853, is an extension of the American Opportunity Tax Credit (AOTC), a provision of the 2009 economic stimulus law that expanded higher education benefits for lower- and middle-income families. Estimates indicate that more than 8 million students and families use the credit, says the National Association of Student Financial Aid Administrators (NASFAA).

The AOTC provides a credit of up to $2,500 and is a greater help to many students than its predecessor, the federal HOPE Scholarship, says Jim Hermes, government affairs director for the American Association of Community  lleges. Unlike the HOPE Scholarship, the AOTC is partially refundable. As a result, Hermes says, low-income families can get up to 40 percent of the credit, or $1,000, refunded to them for eligible tuition costs.

“If you have no tax liability, you can still get a benefit,” he says.

The $2,500 credit also is larger than the HOPE Scholarship and covers course materials in addition to tuition and fees. At some community colleges, course materials may run as much or more than tuition.

“If you’re attending an institution with very low tuition, educational materials may cost you more,” Hermes notes. “This is a larger credit and better for students attending low-cost institutions.”

Middle-income and more affluent families can receive the maximum credit.

AOTC is available to individuals earning up to $80,000 a year and couples with income up to $160,000, says Megan McClean, NASFAA’s federal relations director. Yet these credits are critical to lower- and middle-income families when looking ahead toward college. “We view these credits as an important part of a family’s ability to plan ahead,” she says.

In addition to AOTC, the bill would extend two other tax provisions favorable to students and their families—a $2,500 deduction for interest paid on student loans and a deduction of up to $4,000 in college tuition and related fees. These provisions target lower- and middle-income families as well.

Colleges also may benefit from the bill through a provision to continue credits to employers who provide tuition assistance to their employees. As a result, workers can receive $5,250 in employer-provided tuition assistance on a tax-free basis.

Yet debate on the tax bill focused not on the education provisions but on extending Bush-era tax cuts for upper-income taxpayers and changes in the estate tax that, critics say, primarily serve the wealthy.

Liberal Democrats generally shunned the agreement, including many members of the Congressional Black Caucus.

“There is no way we should be giving tax breaks for people earning over $250,000 and for millionaires and billionaires,” says Rep. Barbara Lee, D-Calif., the CBC chair. “These are the Bush-era tax cuts that dug us into this hole.”

Obama, however, says that, while he opposed tax cuts for the rich, the tax cut deal included many provisions favorable to working Americans, including an extension of middle-class tax cuts and a temporary reduction of 2 percent in Social Security payroll taxes. The White House also negotiated a long-term extension of unemployment benefits, something Republicans previously had strongly opposed.

Some education analysts say the gains outweigh the negatives. “I’d rather see money invested in Pell Grants, but, if the alternative is losing money for education, we’ll take what we can get,” says Mark Kantrowitz, a financial aid analyst and publisher of the web site

The final House vote was 277-148 in favor of the bill, although 112 Democrats opposed the measure. Earlier, the plan cleared the Senate by a sizable 81-19 margin.

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