March 7, 2018
Now that the dust from the new tax law has settled, this much is clear: colleges and the students they serve have come away only marginally affected, a far cry from what seemed possible at the outset of the tax-bill process.
That’s not to say the new law’s impact on college affordability is nonexistent. The law contains key changes affecting some of the primary means through which students and their families pay for college, as well as a number of provisions potentially influencing colleges’ abilities to build and maintain financial safety nets.
Here are four ways the new law potentially impacts college affordability — as well as four proposed changes averted late in the process.
Among the most notable changes, families can now use 529 savings plans — previously just for college — to pay for up to $10,000 a year (per student) in K-12 education costs. Though this change doesn’t directly impact the cost or affordability of college, 529 plans are a core component of the college savings strategy for many families. With a 529 plan, funds can grow and be withdrawn tax-free for education expenses. Those who would have tapped their 529s to pay for K-12 private school in the past might have found themselves less prepared to pay for college.
Home equity loans have been a popular way for families to pay for college. But the new tax law eliminates —at least from 2018 through 2025 — a borrower’s ability to deduct the interest on a home equity loan.
Absent this valuable deduction, many families will find that tapping their home equity to pay for college makes less financial sense than it once did.
Before this tax law passed, investment income earned by private college endowments was tax-exempt. That let schools with the means to do so grow large safety nets with no tax impact. Now, investment income earned by private colleges with endowment assets totaling more than $500,000 per student is subject to an excise tax of 1.4 percent.
It remains to be seen how much this change will affect tuition at impacted colleges. But a small number of well-known schools are now dealing with a financial hit they’ll probably have to account for in some way.
Similarly, one of the marquee changes in the new tax bill — the near doubling of the standard deduction — may have an unpleasant ripple effect on colleges and their ability to raise funds (which helps reduce tuition increases).
By doubling the standard deduction, the new law reduces the incentive for many families to itemize their deductions. Without the ability to claim a charitable contribution write-off, families may have less incentive to donate to their alma maters.
A decrease in charitable contributions may leave colleges with a sizeable financial hole to fill, and tuition could ultimately be impacted.
Fortunately, the proposed changes that would likely have made the largest mark on college affordability didn’t make it into the final bill.
For example, the popular student loan interest deduction — up to $2,500 a year of interest — was kept in place, despite a call for its removal in the House bill. Similarly, tuition waivers for graduate students remain tax-free, though they were almost under the knife. Ditto the first $5,250 students receive in the form of employer tuition assistance.
Another key provision spared in the final version of the new law: the American Opportunity tax credit. It lets qualifying parents take a tax credit of up to $2,500 (per year, per student) for the first four years of post-secondary tuition payments.
Considering how many valuable money-savers were at risk but ultimately spared, things certainly could have been worse for parents, students and colleges.
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