At 2 a.m. on Dec. 1, while college students were either partying, asleep or studying, the Senate passed a brand new tax bill. The Senate’s bill differs from the House's tax bill that passed two weeks ago in several ways, one being that the Senate’s bill would be better for college students. With both the Senate and House having passed separate bills, they will now be working to combine them. While a final tax bill has yet to be put into effect, it’s important to understand four huge ways that the potential bill could impact the lives of college students.
1. The House bill won’t let you deduct your student-loan interest.
Under current tax law, you can deduct up to $2,500 of your student-loan interest from your taxes. This would lower your taxable income and potentially lower the rate at which you are taxed. The House bill, however, removes this measure. It also removes the Lifetime Learning Credit, which allows you to deduct 20% of your first $10,000 of qualified tuition and education expenses, meaning at most $2,000. Eliminations of such policies increase your taxable income and therefore increase your taxes. In exchange, the House bill extends the American Opportunity Tax Credit – which allows you to get up to $2,500 back if you spend $4,000 on tuition and fees – for a fifth year but halved, so the tax credit would only give you back up to $1,250. The Senate bill does not make any of these changes.
2. You might want to rethink grad school.
Tuition waivers are a financial award where the university lowers or gets rid of your graduate school tuition. Currently, these waivers do not qualify as taxable income, but the House bill changes this. The new bill requires that amount you get in tuition waivers must count as taxable income, while more specifically also counting the first $5,250 your employer gives towards your tuition as taxable income. The steep price of graduate school would no doubt greatly change your tax bracket, most likely making you pay more in taxes. The House bill also counts graduate school tuition breaks. So, any amount your tuition is lowered because of your job as, for example, a teaching assistant or research assistant, will also count towards taxable income, further increasing your taxes. The Senate bill doesn’t do any of this.
3. Quality of public schools may go down while cost of attendance may rise.
Anyone who’s filed taxes likely understands that you pay taxes to three separate entities: the local, state and federal government. You can currently deduct the taxes you pay on the state and local level from your federal taxes, but the House bill caps this deduction to $10,000. This deduction serves as a subsidy to state governments, but with it drastically limited, we can expect to see higher taxed states like California, New York, and New Jersey decrease their budget by decreasing the amount spent on public goods, including public universities. If the state budget for state universities decreases, it is likely that the quality of these schools will decrease, and the schools will make up for the loss by increasing tuition.
4. Private schools will get taxed more
Both the House and Senate tax private universities (the entities, not the students) a 1.4% excise tax on money made from investment income (many schools invest money from their endowment in mutual funds as a way to generate profit). The Senate bill would tax an estimated 25 to 30 private colleges whose endowment funds worth $500,000 per student, whereas the House bill would tax around 65 to 70 colleges with endowments worth at least $250,000 per student. It is unclear if this would increase tuition at private schools drastically, but it is an added pressure onto the private schools.
If you’re in college and you pay taxes, you’re not going to like a lot of the provisions of the House bill, which ultimately increases the cost of higher education. Associations of universities and colleges such as the Association of American Universities and American Association of State Colleges mostly agree that the new proposed tax bill makes college more expensive for the majority of students. Many would argue that college students – who collectively have $1.3 trillion in debt – don't need any more debt.
If this bothers you, call your House and Senate representatives and take a stand.
Lead Image Credit: DonkeyHotey via Flickr Creative Commons