As you probably know, the final version of the tax bill passed last month. The plan was introduced by President Trump and the Republican Party at the end of September, promising to enact changes before the end of the year. They did just that, with the President signing it into action only a few days before Christmas. Not only will it trigger tax cuts for the majority of Americans in 2018, the bill is also expected to contribute $1.4 trillion to help the federal deficit in the next decade. House Speaker Paul Ryan says, “Americans are going to see relief almost immediately in the form of bigger paychecks and lower taxes,” but what does it mean for student loans?
The student loan interest deduction stays.
Great news for anyone with college loans, you can continue deducting up to $2,500 each year for the interest paid. The maximum taxpayers save by doing so is $625 per year but the benefit phases out as your income increases. Borrowers no longer get the deduction once they make more than $80,000 as an individual or $160,000 as a couple. However, it’s hard to complain too much about that, right? Before the tax bill was passed, both the House and Senate released their tax plans. The version passed by the House in November would remove this deduction, but the final bill kept it in place.
Tax-free waivers for graduate students remain in place.
Colleges waive tuition costs for roughly 145,000 graduate students throughout the U.S. for their time as a student teacher or researcher. The House’s first version of the bill would have taxed that money as income but in the final version, it remains untaxed in the approved bill for the benefit of the students. This is another bright spot for individuals looking to further their education.
Employer tuition assistance continues to be non-taxable.
Many benefit packages offer employer contributions toward continuing education programs. Under previous tax bills, employers could provide up to $5,250 each year toward employee’s tuition for qualifying education programs, and the money isn’t taxed. This helps employees grow their skill sets or move upward in the company. Another appeal of the educational assistance deduction is it doesn’t have to pertain to a worker’s current role; they can use it to transition into other roles. While the House plan would have made this benefit taxable, the final bill kept it as is. Similarly, there were initially rumors that the tax bill would limit the amount of pretax money that worker’s could invest in their workplace savings accounts. This too did not pass and the rules for these accounts will stay the same.
Discharged student loan debt is no longer taxable.
Typically, student loans can be discharged for one of two reasons, the death of a borrower or a total and permanent disability. Previously in that scenario, those discharged loans were treated as income. The borrower would then be fined a one-time tax bill for the discharged income. This bill was sometimes tens of thousands of dollars, an extreme financial burden, especially for an individual coping with a life-changing disability. Often, the increase in reported income would also make those individuals ineligible for government programs like Medicaid and Supplemental Security Income. Talk about a glitch in the system. Thankfully, the new tax bill reverses this for both public and private student loans. Students who are forced to default on their student loans due to a disability will be freed of their debt, including the taxes, however, this provision expires after 2025 unless renewed by an act of Congress.
Credits for tuition payments stay the same.
The proposed House bill would extend the American Opportunity Tax Credit for another year but repeal the Lifetime Learning Credit and the lesser known Hope Scholarship Credit. However, the Senate bill suggested no changes and the final bill also left it as was. That is a benefit for graduate students who would have lost up to $2,000 on the Lifetime Learning Credit. Additionally, since part-time students don’t qualify for the American Opportunity Tax Credit, they would have received nothing from the House tax plan.
Private Universities will be taxed on endowment earnings.
Both House and Senate versions of the tax bill called for a new tax on private universities. The final version will tax endowment earnings at 1.4%. This applies only to private schools with at least 500 students and endowments worth $500,000 per student, which experts say is less than 30 colleges. While a 1.4% tax seems small, this tax could cost those colleges more than $1 million each year. Officials at those colleges criticized the bill saying it would limit their resources to provide financial aid, especially since many of the colleges affected are among the most generous with financial aid. This likely means many students at those institutions will pay more out of pocket. However, it is estimated to bring in almost $2 billion in revenue over a decade.
Other measures that affect education.
While not directly related to your student loans, the new bill could affect future students’ college financing. First, lawmakers voted to cap the state and local tax deduction at $10,000. Some college officials say this could hurt public colleges’ ability to raise money, which could in turn raise college costs for new students. Also, bonds used for campus construction will remain tax-free. As most students know, their tuition often increases when campus developments are made, from new admin buildings to sports stadiums. This provision helps keep that cost down, by lessening the tax burden on college renovations.
What’s going to happen now.
Major U.S. tax reform only happens every few decades or so. That means today’s youth will be living with this tax code for many wage-earning years to come. Thankfully, things are looking pretty good for current and former students. While the initial package proposed by the House was much harsher on student loans – experts say it would have reduced tax incentives for higher education by nearly $65 billion over 10 years – borrowers everywhere can breath a sigh of relief that most of the higher education tax system will stay in the same. So how does Trump’s tax bill affect student loans? In short, not much differently than the last tax bill passed.