Over the weekend, the White House announced a broad outline of the tax-reform plan that President Obama will lay out in his State of the Union address on Tuesday. While unlikely to gain much traction with a Republican Congress, the plan could help set the agenda for Democrats looking ahead to 2016. The plan would increase taxes on wealthy individuals and financial firms, and would offer new and expanded benefits to low- and middle-income households. It also has several direct implications for higher education.
Funding Free Community College. Earlier this month, the Obama administration unveiled a plan to offer two years of community college tuition-free to students who meet certain criteria through a partnership between the federal government and states. The administration estimated that doing so would cost the federal government $60-billion over 10 years.
Under the tax plan, proposals to increase the top capital-gains and dividends tax rate for high-income households, close a trust-fund loophole, and charge a fee to financial firms that borrow heavily would be used to pay for the community-college plan, among other things.
Streamlining Higher-Education Tax Credits. Higher-education tax credits have been roundly criticized—as incredibly complicated, as not available until after college bills are paid, as helping people who don’t need them, and as having no discernible impact on college enrollment. Even so, the credits remain a multibillion-dollar form of federal student aid.
The tax plan would heed some of the criticism by simplifying tax breaks and tailoring them to help a less-affluent slice of the population. The plan would roll the Lifetime Learning Credit and the deduction for tuition and fees into the American Opportunity Tax Credit. It would offer just one vehicle for education-savings tax breaks, rolling back expanded tax cuts for 529 savings plans and repealing future tax savings for the Coverdell education-savings program. Those moves would streamline the current expansive menu of tax benefits.
The New American Opportunity Tax Credit. This tax credit was created as a more-generous replacement for the Hope tax credit in the 2009 economic-stimulus bill. It is currently set to expire after 2017, but the new tax plan would make it permanent. The credit would be set at $2,500 a year for up to five years (up from the current four years) with increases tied to inflation. The plan would make $1,500 of the tax credit refundable, up from $1,000 today, a move that would help low- and moderate-income families.
It would also extend the credit to students enrolled less than half time: They could get a credit of $1,250, with up to $750 refundable.
The plan would also help low-income students by exempting Pell Grants from taxation and the tax-credit calculation, simplifying what is now a very complex relationship between the grant and the tax credit.
And the plan would require colleges to give students the information about tuition and fees necessary to claim the tax credit.
Changes in Tax Relief for Federal Student-Loan Borrowers. The administration has made a big push to let borrowers know about its Pay as You Earn repayment plan, under which borrowers make monthly payments of no more than 10 percent of their discretionary income and have any remaining balance forgiven after 20 years of payments. But when that time comes, borrowers face an additional expense under current law—the forgiven debt is treated as taxable income. The tax plan would change that, removing a big uncertainty borrowers face under income-based repayment. It would also repeal the existing tax deduction for student-loan interest for new borrowers.
There’s a lot of detail to wade through in the new plan, but it has already gotten some positive feedback from a group that has raised concerns about existing higher-education tax benefits. In a statement released on Saturday, the Young Invincibles, an advocacy group, offered its support for the plan, calling it “a win for hard-working students.”
Beckie Supiano writes about college affordability, the job market for new graduates, and professional schools, among other things. Follow her on Twitter @becksup, or drop her a line at beckie.supiano@chronicle.com.
