21 May College Financing Under the New Tax Bill: What Happens Now?
by Jennifer Trauman, College Ave Student Loans
If you’re in the business of helping people build higher education financing strategies, you’re in the business of answering a lot of questions. With a brand new tax bill in effect as of January 1, 2018, you’re likely to start fielding some new questions, so let’s take a look at what the new bill has and hasn’t changed.
What Hasn’t Changed
The final version of the tax bill passed in December of 2017 keeps in place the American Opportunity Tax Credit (AOTC).
The AOTC allows those investing in a four-year college education to receive a tax credit up to $2,500 in qualified education expenses per student on their federal tax returns. This tax credit is still available to those who meet the income limits ($90,000 modified adjusted gross income for single taxpayers; $180,000 for married taxpayers filing jointly).
Families can continue to deduct up to $2,500 of student loan interest on their federal tax return. This deduction is only available to those who meet the income limits ($80,000 modified adjusted gross income for single taxpayers; $165,000 for married taxpayers filing jointly).
There is also no tax on employer tuition assistance programs up to $5,250 per year or tuition waivers for graduate students, and the Lifetime Learning Credit remains unchanged.
What Has Changed
Prior to the new tax bill, families borrowing against home equity to help pay for college were allowed a tax deduction on the loan interest. That is no longer the case. The new tax bill officially suspends the HELOC (Home Equity Line of Credit) deduction from 2018 to 2025.
Families might now consider this type of equity less relevant to their overall financial picture, so if you’re among the private universities requiring home equity as part of an initial aid assessment, you might experience some pushback. If you’re among most schools, however, you’ll be talking with families who are simply unsure about this type of loan as an added resource.
What’s the Answer?
There is no one-size-fits-all advising on this, but it is always a good idea to remind home owners that a HELOC has built-in risk factors. Interest rates tend to be low, but they may be variable, and without the benefit of the tax deduction, they could become costly.
Families should also make sure they have enough financial stability to pay off a home equity loan in a timely manner, and that it won’t affect retirement savings.
Read more in The New York Times:
“With a Tax Deduction Gone, Is Home Equity a Smart Way to Pay for College?”
What Else to Consider
If people are combing the new tax bill for changes that might indirectly affect their education, they might bring up the new 1.4% excise tax private colleges and universities are now required to pay on certain endowment earnings. There is speculation those costs might eventually manifest in tuition bumps, assistance limits, or program removals. It is probably premature to discuss any specifics on that, but it can’t hurt to be prepared for the inquiry.
What Is Still Best Practice
Scholarships, grants, and federal loans in the student’s name should be the first options families consider when budgeting for college. If these resources fall short in covering costs, a private student or parent loan can help – particularly with expenses not eligible for coverage through other forms of financing. Work-study opportunities can also help fill in gaps, so if your school offers them, be sure to advise those eligible.
Successful funding strategies often include multiple ways to pay. When students look at all sources of funding, they generate a balanced plan that mitigates risk.
For the most up-to-date information on tax law changes, visit the IRS Newsroom:
IRS.gov – Resources for Tax Law Changes