Although we are only a few weeks beyond the deal Congress made to avoid the “Fiscal Cliff,” it’s time to start worrying again. As you may recall, the deal did make some guarantees and lock in some important programs for college students and their parents. These included:
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.
Repeal of 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.
Moratorium on Repeal of the 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 continued through the end of this year — 2013 — at which point, more political wrangling will likely ensue.
The limit on Coverdell Education Savings Accounts was permanently raised to $2,000. This had been a temporary limit over the past few years and with the issues surrounding the Fiscal Cliff and impending reauthorization, the maximum contribution 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.
But for the most part, the deal to avoid the fiscal cliff only pushed back the problem until the end of February. Sequestration of funds and an almost 8 percent across the board cut of remaining programs and federal aid are still a real possibility. The most vulnerable are the so-called campus-based programs, Work Study and Federal Supplemental Educational Opportunity Grants (FSEOG). While these programs tend to be less talked about than the big dogs, Pell Grants and subsidized student loans, they still account for a large percentage of federal funds earmarked for student aid. Unless Congress can reach another, ideally more-permanent, solution, these programs are in real danger of being cut.
What is particularly problematic is that FSEOG and work study tend to be programs used by students with the most financial need. Federal Supplemental Educational Opportunity Grants are administered directly by schools’ financial aid offices — thus the “campus-based” designation. According to federal guidelines, FSEOG program offers “need-based grants to help low-income undergraduate students finance the costs of postsecondary education.” Institutions, in determining which students receive such grants, must “give priority to those students with ‘exceptional need.’”
The Federal Work Study program, on the other hand, “provides funds for part-time employment to help needy students to finance the costs of postsecondary education.” Institutions that qualify to offer Work Study funds to their students with need are required to allocate a percentage of their Work Study dollars to “support students working in community service jobs, including: reading tutors for preschool age or elementary school children; mathematics tutors for students enrolled in elementary school through ninth grade; literacy tutors in a family literacy project performing family literacy activities; or emergency preparedness and response.” So a cut to work study will not only hobble the ability of needy students to earn money for college, but will also deny community service organizations the ability to fund jobs that they otherwise may not be able to afford.
Adding insult to injury, unless a deal is reached to address student loan interest rates, those needy students who have had the FSEOG and Work Study grants cut will have the pleasure of paying double the interest rate on the student loans they take out in order to cover the lost grant funds. Last year, Congress temporarily froze the interest rates on subsidized student loans at 3.4 percent — they were supposed to have gone up to 6.8 percent on July 1 of 2012. Unless new action is taken, Stafford loan interest rates are set to increase on July 1 of this year.