Five things college savers should know about the tax plan

Published November 03, 2017
Dow Jones Newswires

The House Republican tax plan includes a number of provisions that, if part of a final bill, would affect a swath of popular higher-education benefits and programs.

While some of the proposed changes would clearly cost some individual students and their families, experts say, others would offer relief or simplify the savings process.

The plan calls for about $65 billion less in tax benefits for postsecondary students and borrowers over the next decade, according to the congressional Joint Committee on Taxation. But many of those taxpayers would benefit from broader provisions of the plan, like lower marginal rates and a sharply higher individual standard deduction.

Here are five things college borrowers and savers should know:

1. Student-loan interest deductions

The GOP plan proposes ending the popular student-loan interest deduction. Currently, borrowers with a modified gross income of $65,000, or $135,000 for couples, can deduct up to $2,500 a year on interest paid toward qualifying federal and private student loans.

About 12.4 million people claim the student-loan interest deduction, according to the Internal Revenue Service.

Borrowers who are in the 25% tax bracket roughly save about $272 and a maximum of $625, says Mark Kantrowitz, a financial-aid expert and publisher of Cappex.com, a website that connects students with colleges and financial aid.

2. Tax credits

The tax plan would increase aid available under the American Opportunity Tax Credit, or AOTC, which helps defray such higher-education costs as tuition, fees and course materials.

Currently, students can collect a credit of up to $2,500 a year -- or an annual tax refund of up to $1,000 -- for a maximum of four years while enrolled in a degree or certificate program. The GOP plan would maintain the AOTC benefit while providing a fifth-year credit of up to $1,250, or a maximum refund of $500.

The GOP plan would eliminate two other credits for students, the Hope Scholarship Credit and the Lifetime Learning Credit, that cover similar expenses.

3. Coverdells and 529s

The plan would phase out Coverdell education-savings accounts and guide savers into "529" college savings plans.

Coverdell accounts are similar to 529s in that they offer tax-free withdrawals when the funds are used on qualified education expenses. But unlike a 529 plan, a Coverdell can be used to save for K-12 expenses.

"They basically took the best feature of the Coverdell and rolled it into the 529," Mr. Kantrowitz says. This means that 529 plans will now be able to be used to pay for elementary and secondary education.

According to the GOP plan, no new contributions to Coverdell accounts, except rollover contributions, will be accepted after Dec. 31, 2017.

The GOP plan would also allow an "unborn child" to be named a beneficiary of 529 accounts, a provision that has generated questions and some opposition. The plan defines "unborn child" as a member of the species homo sapiens at any stage of development, who is carried in the womb."

Families aren't currently able to open a 529 in a child's name or make them a beneficiary of such an account until the child has a Social Security number. As a workaround, families name the parent as the beneficiary and then change the beneficiary once the intended recipient is born.

Financial adviser Jeff Levine of BluePrint Wealth Alliance says he's unsure of the mechanics of how it will work. "There's no Social Security number yet and the parents may not even have a name," he says.

NARAL Pro-Choice America responded to the provision, objecting to what it called "'personhood' language" in the tax bill.

4. Tuition assistance

The GOP plan proposes the repeal of employer-paid tuition assistance of up to $5,250, which many employers offer to help employees with the cost of college. (The benefit isn't taxable to the employee but is deductible for the employer.)

This repeal may be opposed by employers who are increasingly offering the benefit to attract talent, Mr. Kantrowitz says.

The plan also wouldn't restore a recently expired provision that allowed taxpayers to deduct up to $4,000 a year in tuition and related expenses, if they earned less than $65,000 in adjusted gross income.

5. Relief for death or disability

Under the current system, if student-loan borrowers die or become permanently disabled, their loans would be discharged and they (or their estate) would be taxed on the amount of the discharge.

In the GOP plan, however, borrowers who die or are permanently disabled will no longer get taxed on this amount.

"This is a big benefit," says Mr. Kantrowitz.

--Josh Mitchell contributed to this article

Write to Veronica Dagher at veronica.dagher@wsj.com

(END) Dow Jones Newswires

November 03, 2017 13:42 ET (17:42 GMT)