Monday, December 18, 2017
Posted by: Michele Streeter
Congress Takes Hands Off Tax Perks For Grad Students, Student Loan Borrowers
By Matt Carter
December 18, 2017
An overhaul of the U.S. tax system will preserve a number of tax benefits for college students and student loan borrowers that had been targeted for elimination by House Republicans — including the student loan interest deduction and tax-free tuition waivers for grad students.
But private colleges with big endowments are smarting at the prospect of a new 1.4 percent excise tax on their investment income.
Backers say the tax on endowments — which will affect not only Ivy League Schools like Princeton, Harvard, Yale, but other elite schools nationwide like Notre Dame and Stanford — will provide an incentive for schools to use their endowments to lower tuition.
Conference Committee Takes Lead From Senate
After weeks of uncertainty and negotiations, a conference committee tasked with resolving conflicts between competing tax plans approved by the House and Senate has come up with final language of legislation that’s expected to land on President Donald Trump’s desk before Christmas.
According to a breakdown of the bill’s key provisions published by the conference committee today, several proposals put forward by House Republicans to limit tax breaks for college students and student loan borrowers that were snubbed by the Senate have also been scrubbed from the final bill.
Tax perks for college students and student loan borrowers that will be preserved include:
Student Loan Interest Deduction
About 12 million student loan borrowers a year claim this “above the line” deduction to reduce their taxable income by up to $2,500. The deduction — which can save taxpayers in top tax brackets up to $625 — phases out for single taxpayers earning more than $65,000 and can’t be claimed by those earning more than $80,000 a year (for married couples filling jointly, the deduction starts phasing out at $135,000, and can’t be claimed by those making more than $165,000).
Although House Republicans proposed killing the student loan interest deduction, the GOP holds a more narrow majority in the Senate, and the proposal was left out of the tax bill approved there and in the final language approved by the conference committee.
Tax-Free Tuition Waivers and Discounts
The tax bill passed by House Republicans last month would have counted tuition waivers and discounts that colleges and universities provide to graduate students and employees be taxed as income. The American Council on Education estimates that about 145,000 graduate students receive tuition waivers or discounts, with students pursuing master’s degrees receiving nearly $11,000 in tuition waivers for serving as research and teaching assistants, on average.
Graduate students and colleges that depend on their contributions as teachers and researchers protested a tax on tuition waivers, and the Senate’s tax bill included no such provision. The conference committee went with the Senate’s approach.
Tax-Free Employer-Provided Tuition Assistance
Under current law, employers can provide up to $5,250 in tax-free tuition assistance to employees. The tax bill passed by House Republicans would have treated this employer perk as taxable income. The Senate tax bill left existing law in place, and that’s the approach taken by the conference committee.
Higher Education Tax Credits
Eliminating the student loan interest deduction, treating tuition discounts and waivers as income, and taxing employer-provided tuition assistance would have generated $47.5 billion in additional tax revenue over the next decade, backers said.
House Republicans also proposed raising another $17.3 billion in revenue over 10 years by streamlining three existing higher education tax credits — the American Opportunity Tax Credit, the Hope Scholarship Credit, and the Lifetime Learning Credit — into a single program of less value to graduate students. The plan was to allow students to claim the American Opportunity credt for five years, instead of four, but eliminate the Lifetime Learning Credit (which had, for the most part, already replaced the Hope Scholarship Credit).
The Senate left all three higher education tax credits in place, and the conference committee followed the Senate’s lead.
Tax Exemption For Qualified Student Loan Bonds
House Republicans were intent on eliminating tax exemptions for all “private activity bonds,” which finance affordable housing, schools, hospitals, and airports, and nonprofit lending.
Nonprofit and state-based student lenders in 19 states objected to the move, saying the ability to fund loans by issuing tax-exempt bonds allows them offer lower interest rates and fees.
A trade association representing nonprofit and state-based lenders, the Education Finance Council, estimates that its members provided $1.2 billion in loans to 75,000 borrowers during the 2016-2017 school year.
Tax On Endowments Survives
Convinced that some colleges and universities are sitting on huge endowments that generate investment income that can be used as a slush fund, House Republicans decided to impose a 1.4 excise tax on the investment income of private schools with at least 500 students and assets of at least $250,000 a student ($125 million).
Senate Republicans thought enough of the idea to include it in their tax bill, but doubled the the per-student threshold to $500,000, meaning schools with less than $250 million in assets would be exempt.
The bill approved by the conference committee adopts the Senate’s approach, although schools with more than 50 percent of their tuition paying students located outside of the United States would be exempt.
On Deck: Overhaul of Student Loan System
Once the tax bill is behind them, lawmakers are expected to turn to other pressing issues, including reauthorization of the Higher Education Act. House Republicans have introduced legislation to “simplify and improve student aid” by creating a system with “one grant, one loan, and one work-study system.”
The Promoting Real Opportunity, Success, and Prosperity through Education Reform (PROSPER) Act would eliminate up-front fees and increase borrowing limits for most types of government student loans. But the bill would also impose tighter limits on federal student loans to parents and grad students, which could make some families more reliant on private lenders.
The PROSPER Act, which sailed through the House Education Committee on Dec. 13 in a 23-17 vote, would also:
- Eliminate subsidized loans to low-income students, which could cost some families thousands in additional interest payments.
- Replace several existing income-driven repayment programs — PAYE, REPAYE, IBR and ICR, which provide loan forgiveness after 10, 20 or 25 years of payments — with a new IDR plan that would put a cap on total interest charges.
If the PROSPER Act were to become law, existing borrowers could remain in their current income-driven repayment plan. Although the legislation would eliminate “time-based loan forgiveness,” for new borrowers, the cap on interest charges would be a better deal for many borrowers than existing income-driven repayment plans.
That’s because the PROSPER Act’s income-driven repayment plan would allow borrowers to stretch out their payments over a longer period of time, but they would never pay more total principal and interest than they would have paid under a standard 10-year plan.
Currently, borrowers who choose to stretch out their payments over as long as 20 or 25 years in programs like PAYE and REPAYE often pay considerably more than borrowers enrolled in the standard 10-year plan — particularly if they do not end up qualifying for loan forgiveness.
An analysis by the Center for American Progress found some borrowers earning very modest incomes would be better off in PAYE or REPAYE. But the PROSPER Act’s income-driven repayment plan would be a better deal for most borrowers, the analysis showed.
Critics say other language buried in the 542-page bill would give religious colleges and universities a blank check to discriminate against students based on their sexual orientation and gender identity, and deter public universities from enforcing their own nondiscrimination policies for student organizations.
Many observers expect that as was the case with the tax bill, the Senate will have its own ideas about reauthorizing the Higher Education Act, and will not get behind all of the provisions put forward in the House.