As students and parents greeted the new year and began shake off the grogginess of winter break, President Obama offered a proposal to bring our trip over the edge of the fiscal cliff to a careening, pebble-scattering halt… for a few weeks anyway. The proposal was by no means perfect and contained much to criticize. But it was something. Yet, it (and could we have waited any longer to put together a plan? Seriously? Haven’t we known this was coming for a while now?) threw us again into the midst of the same backing and forthing that brought us to the brink in the first place. Thus the term brinkmanship, I guess.
At any rate, much like the recent Mayan calendar scare, the horrors of the fiscal cliff have been averted (for now) and student aid will be, for the most part, okay. In fact, some improvements have been made in a few key areas. The deal, packaged as the American Taxpayer Relief Act of 2012, passed late on New Year’s Day, directly addressed several key points that directly affect college students and their parents.
One of the crucial components in the law is the extension of the American Opportunity Tax Credit. The tax credit, which was set to expire on January 2, has been extended for an additional five years, through the end of 2017. In the weakened economy this tax credit has been key in helping families to defray the costs of undergraduate education. It allows students (or their parents if the student is their dependent) to deduct up to $2,500 per year off their tax bill over a period of four years. During four years of undergraduate school, $10,000 in tax savings is huge in terms of alleviating some of the pain that paying for higher education can cause.
Two other tax-related provisions in the bill have a direct impact on college affordability. The Act permanently repealed the time and carry forward limits for deducting interest payments on student loans. Under the previous version of the Student Loan Interest Deduction, students and their families could deduct up to $2,500 over a period of 60 months. The new bill permits the deduction to survive beyond the previous five-year limitation.
The other big tax incentive that survived its trip to the precipice is the so called Tuition and Fees Deduction. A big one, allowing families and students claim up to $4,000 in tuition costs on their tax returns, the deduction has been continues through the end of this year — 2013 — at which point, more political wrangling will likely ensue.
Lastly, the maximum limit on contributions to Coverdell Education Savings Accounts was permanently raised to $2,000. This had been a temporary limit over the past few years and with the impending Fiscal Cliff and reauthorization issues, was set to fall back to its original $500 limit. Other permanent changes to the Coverdell accounts include that they may be used to cover tuition for K-12 schools as well as college, and that the amounts that can be set aside will be phased out for those at higher income levels.
These changes are all great for students and their families, of course. However, the Fiscal Cliff itself still looms as it has really only been pushed back. Sequestration is still scheduled to occur if a permanent deal is not reached by March 1. If this happens, the 8.2 percent across-the-board spending cuts would still have a deleterious effect on student aid funding. Pell Grant award amounts would be reduced by as much as $400 per year. Fewer students would be eligible for such grants, as well as other federally funded aid programs like work study and Federal Supplemental Educational Opportunity Grants. Moreover, the costs for obtaining federal student loans, as well as the interest rates on such loans, would increase unless another new deal is reached. Less obvious but still as problematic, is a reduction in federal research spending and grants to universities. Fewer federal dollars pouring into institutions of higher learning will result in tuition increases and less college-based aid for students.
Once again, I expect that lawmakers will sit on their hands and do nothing for the next couple months and then dust off their pointing fingers and start shouting back and forth across the aisle at the end of February. Oh well, it’ll give all something to write about, anyway.