The voices of Tax Policy Center's researchers and staff
The House Ways & Means Committee version of the Tax Cuts and Jobs Act (TCJA) rightly aims to simplify a complex system of tax subsidies for higher education. However, by also reducing tax incentives for higher education by $64 billion over 10 years, it would reduce incentives for individuals to invest in human capital. This is in contrast to the bill’s business tax cuts that are intended to increase investment in physical capital.
The bill would retain the American Opportunity Tax Credit (AOTC), the main tax benefit that provides educational assistance for low and moderate income families. At the same time, it would eliminate other education tax credits, deductions, and other incentives. Graduate students and workers attending school part-time could see the largest tax increases.
Currently, tax-based assistance for higher education is highly complex. Families with college students may choose between two overlapping tax benefits: the American Opportunity Credit (AOTC) and the Lifetime Learning Credit (LLC). The AOTC is more generous and is partially refundable but eligible students must be enrolled at least half-time in degree programs and in their first four years of postsecondary schooling.
In contrast, the LLC is less generous but can be claimed by any student attending an eligible education institution. Until this year, students could also partially deduct tuition and fees from their federal income tax. However, that provision expired at the end of 2016.
These are just the beginning. There are more than ten other tax breaks for higher education including two separate savings vehicles for college tuition, a student loan interest deduction, and the exclusion of scholarships, tuition reductions, and employer provided educational assistance from taxable income.
This complexity may be one reason why many families fail to take full advantage of tax benefits for higher education. This has been documented by the Government Accountability Office, among others.
The TCJA would change the tax breaks for higher education in these ways:
- Retain the AOTC and extend eligibility to a fifth year albeit at half the regular amount.
- Repeal the LLC.
- Repeal the student interest deduction.
- Repeal the tax exclusion for employer-provided education assistance.
- Repeal the tax exclusion for tuition reductions for university employees and graduate student instructors and research assistants.
- Disallow new contributions to Coverdell savings accounts and allow distributions for qualified education expenses from 529 plans at private elementary and secondary schools.
- Not restore the tuition and fees deduction.
The Joint Committee on Taxation (JCT) estimates that the education provisions would increase tax revenues by over $64 billion over the next 10 years. The education tax credit provisions (extending the AOTC and eliminating the LLC) would save $17 billion. Changes to education savings accounts would save less than $1 billion. The rest of the changes would increase revenues by $47 billion, about half the savings from ending the deduction for student loan interest, one-third from eliminating the exclusion for employer-provided education assistance, and one-fifth from eliminating the exclusion for tuition reduction programs for grad students and others.
Simplifying the system could potentially increase use of education benefits among those eligible. Keeping the AOTC is important for low- and moderate-income students since it is the only refundable education tax benefit that benefits families without income tax liability.
But many students and former students would experience higher taxes under the proposal. Most graduate students currently receiving the LLC would lose assistance and graduate student instructors and research assistants would be taxed on their waived tuition. Workers going back to school part-time or in non-degree programs wouldn’t be eligible for a tax credit and others would have to pay tax on the value of schooling paid for by their employers. And former students with loans would no longer be able to deduct interest paid on those loans under the proposal.
While simplifying the tax code and streamlining options is desirable, increasing the cost of higher education could make it unaffordable for some students. It also seems like a move in the wrong direction for a tax reform proposal that claims to be focused on increasing worker wages. Research shows that a more direct pathway to higher wages and salaries is through encouraging education and increases in human capital rather than physical capital.
Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.