Top 5 Effects of Tax Reform On Affording College

Top 5 Effects of Tax Reform On Affording College

The tax code has been rewritten in several ways by the final version of the GOP tax bill passed last month.  It eliminated deductions and made additional new benefits. Some of these new provisions impacted those paying to enter college.

The several provisions proposed in the House’s tax bill caused a public outcry. The Senate version that passed last month then left a lot of tax credits related to higher education untouched.

The deduction for student loan interest was kept by the new tax bill. Furthermore, the tuition waivers that graduate students receive will stay tax-free and other tax credits including the Lifetime Learning Credit and the American Opportunity Tax Credit still exist.

According to Shannon Vasconcelos, director of college finance at College Coach, an admissions consulting firm, changes were expected but nothing really changed much such as the taxation of the tuition waiver and the taxation of employer tuition assistance.

However, a few crucial changes will affect families and students who are paying to get a higher education. The following new tax codes may change a family’s financial standing:

1. Elimination of Deductions for Interest On Home Equity Loans and Lines of Credit

The ability to deduct interest on home equity loans is eliminated from 2018 to 2025 according to the new tax legislation. 

Losing the deduction is going to cost a lot of families a significant amount of money since most of them use their home equity to pay for college. Since the new restrictive mortgage rules cap’s interest on new loans to $750, 000, a lot of middle-income taxpayers will no longer be able to use home-equity loans in the future to fund college tuition while compounding tax-deductible interest.

2. Families Can Pay for K-12 Education Using 529 Plans

The qualified education expenses can now be used by families in a tax-advantaged 529 savings account to pay for elementary or secondary school tuition. An amount of up to $10, 000 per student per year in K-12 tuition can be used by taxpayers according to the new tax code.

However families are advised by college experts to be careful in utilizing this new flexibility with 529 accounts. Parents shouldn’t use the money too quickly when redirecting these funds to cover private school education as they may come up short for college as expressed by Sean Moore, founder of SMART College Funding.

3. New Excise Tax On Endowments 

Private education institution’s endowments that amount to higher than $500, 000 per student now have a new excise tax of 1.4 percent. The new provision is expected to affect the scores of private universities with large endowments such as Harvard University in Massachusetts, the University of Notre Dame in Indiana and Stanford University in California, among others.

4. Student Loans Discharged for Death or Disability Tax-exemption

Federal and private education loans discharged due to death and disability is tax-free under the new tax code. In the past, the debt cancellation would be considered as income on to the taxpayer’s bill. Today, the cancellation of the student debt is tax-free. But discharges that happened during 2018 to 2025 can only benefit from the new tax code.

Moore from Smart College Funding said families who suffer from those devastating effects will find this change helpful but the truth is the people that benefits from it are very small.

5. No More Taxes on Alimony Recipients

Experts in the college consultation say this provision should make the qualification for need-based aid easier for custodial parents in filling out the Free Application for Federal Student Aid also known as FAFSA. For the most part, parental information such as tax records is the basis of FAFSA when selecting college-bound students.

Eliminating the alimony on their tax returns will make divorced custodial parents eligible for financial aid according to Joe Orsolini, president of College Aid Planners, a consulting organization in Illinois that helps families navigate paying for college. This change allows them to qualify much easier than before. 

The tax records used by FAFSA comes from the prior year even with this provision which means there is a time gap to when this new tax code would be advantageous to a custodial parent. This is a great deal for these parents unless the Department of Education realizes this and does something to change the FAFSA.

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