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College students and people with education debt can breathe a sigh of relief, mostly: The tax bill now being sent to President Trump preserves a student loan interest deduction and doesn’t include a provision that will have taxed graduate student tuition waivers.
“I believe that students and families really did dodge a bullet,” says Steven Bloom, director of presidency relations in the American Council on Education, which represents college and university presidents. “The final goverment tax bill is, thankfully, a lot better than the earlier versions for the reason that it will preserve a lot of provisions that are important to students and families.”
But students aren’t in the clear yet. Congress is preparing legislation to overhaul the federal student aid system, meaning there’s another crucial political battle looming that could have?big consequences for college students.
Here’s where students will stand underneath the new tax rules, and just what they ought to watch out for as Congress debates more higher-education changes.
Where students will stand after tax revision
Most of the changes which were passed will go into effect for the 2018 tax year, on returns due in April 2019. Once revisions are in place, here’s where students will stand:
Graduate?assistants and other university employees
Tuition waivers for graduate assistants along with other university employees remain untaxed. Graduate and Ph.D. students who receive free or reduced tuition might have had to pay income tax on the amount of their tuition benefit under the House bill. Graduate tuition can exceed $50,000 per year at some schools.
Student loan borrowers
The new rules keep your student loan interest deduction, which allows taxpayers to shave up to $2,500 off their taxable income, a savings of $625 for someone in the 25% tax bracket. In 2015, the average student loan interest deduction was nearly $1,100, worth about $270 to someone within the 25% bracket, according to NerdWallet’s analysis of IRS data.
The student loan interest deduction is an above-the-line deduction, meaning taxpayers don’t need to itemize to claim it. They can benefit from both the education loan interest deduction and also the increased standard deduction, which?rises from $6,350 to $12,000 for individual filers.
College students as well as their parents
Tax benefits for college kids – or their parents, if the parents pay – remain in the tax rules. They include the American Opportunity Tax Credit, Lifetime Learning Credit, deduction for qualified tuition expenses, and tax exclusion for employer-provided education assistance.
Dead and disabled student loan borrowers
The new rules remove a tax on student loans forgiven if a student dies or perhaps is permanently disabled. So far, the forgiven amount was taxed as income.
Colleges and universities
While college students and education loan borrowers likely emerge ahead, critics worry the new tax rules will reduce funding for universites and colleges and make advanced schooling much more expensive to students.
A new excise tax on some college and university endowments means there will be fewer dollars available for scholarships, student services along with other expenses, John Walda, president of the National Association of school and University Business Officers, said in a statement. Critics also fear the increased standard deduction will discourage charitable giving to universites and colleges, and changes to the local and state tax break could harm state-funded education.
More potential changes loom
Meanwhile, the House has started reauthorizing the larger Education Act, which governs federal financial-aid programs and it is overdue for review. The reauthorization bill, known as the Promoting Real Opportunity, Success and Prosperity through Education Reform (PROSPER) Act, cleared the home education committee earlier in December.
The bill would pare down several existing grant and loan programs to the Pell Grant along with a single federal ONE Loan program. Other provisions would eliminate origination fees for federal student education loans, simplify the Free Application for Federal Student Aid, known as the FAFSA, and add a $300 Pell Grant bonus for students who take a minimum of 15 credits per semester.
But the bill includes proposals to eliminate Public Service Loan Forgiveness for loans made underneath the ONE Loan program, repeal rules designed to protect students from unscrupulous for-profit colleges, and eliminate subsidies for student loans which cover the cost of interest while students have been in school.
The bill’s backers say it will simplify federal financial aid programs, promote college completion, remove outdated government requirements and help train students for the country’s Six million unfilled jobs. Critics warn the legislation benefits private lenders and for-profit colleges rather than students and individuals with student debt.
But student loan borrowers shouldn’t panic about PROSPER yet, says Betsy Mayotte, president and founder of The Institute?of Education loan Advisors.
“Nobody thinks this bill is going to pass anytime soon,” she says, adding that progress on the bill could get pushed to 2019, after the midterm elections. “This is by no means a done deal.”