The House Republican tax bill heading to the floor this week cuts approximately $65 billion in higher education tax benefits. And while the Senate proposal skips over most higher education tax provisions, both proposals also add $1.5 trillion to the deficit, putting critical investments like Pell grants, as well as non-education federal investments that promote financial security and economic mobility, at increased risk going forward.
By hacking away at higher education tax benefits to pay for tax cuts that send the biggest benefits to higher-income families and corporations, the House proposal pulls money from students and families in debt. At the same time, both bills would set the stage for even more harmful cuts in future Republican budget proposals. The GOP already points to the deficit to justify budget proposals that severely underinvest in—or cut—federal spending on successful programs like the Pell grant. Make no mistake—tomorrow’s students will be asked to pay for today’s corporate tax cuts.
So what should lawmakers have done instead? A tax bill designed to (a) create both a more equitable and economically efficient tax code, while (b) leveraging existing aspects of the code to improve the higher education system, would have looked very different. That alternative tax reform bill would have had to include a major overall shift in spending priorities to focus on low- and middle-income families, and it also would have treated higher education tax provisions very differently. Below is a quick look at four of those provisions.
1. Lifetime Learning Credit/AOTC
What the GOP proposals do
The House proposal ends the Lifetime Learning Credit (LLC), a non-refundable credit providing up to $2,000 for qualified education expenses. Because of certain eligibility criteria and the availability of the American Opportunity Tax Credit (AOTC)—a partially refundable tax credit available for qualified education expenses for four years—the LLC is most useful to graduate and nontraditional students. The bill puts some of that money into expanding the American Opportunity Tax Credit for an extra year (up to $1,250, half of what’s available in the first four years), but pulls most of that money—$17.3 billion—in order to pay for tax cuts that disproportionately benefit corporations and wealthy families. The Senate bill stays silent on these higher education provisions.
What they can do instead
Higher education tax provisions are too complicated and should be better targeted to the families who need more help paying for college; however, the House bill uses simplification as a cover for moving $17.3 billion from education to poorly targeted tax cuts. A tax reform bill could instead consolidate existing higher education tax benefits to both make the AOTC fully refundable and to coordinate it more seamlessly with Pell grants, so that low-income students can combine the benefits to living expenses beyond tuition, fees, and books—reforms previously proposed by think tanks and advocates.
2. Student Loan Interest Deduction and Other Exclusions
What the GOP proposals do
The House proposal raises taxes on student loan borrowers by ending the student loan interest deduction, an above-the-line deduction of up to $2,500 that phases out above $80,000 for individuals. At present, more than 12 million borrowers take this deduction. In eliminating it, House Republicans once again conflate “simplification” with “benefit cuts.”
The bills also cut a number of smaller exclusions, including the exclusion from income of employer-provided educational assistance and of certain qualified tuition assistance. The Senate GOP proposal leaves these exclusions and the student loan interest deduction intact.
What they can do instead
Given the scale of student debt loads, eliminating a deduction that could be better targeted to pay for tax cuts that are very poorly targeted goes in the wrong direction. A positive reform would be to target the deduction toward those who need more help paying down debt—perhaps by lowering income limits or phaseouts—and spend any savings on low-income students by reducing amounts borrowed in the first place through improvements to the AOTC (as discussed above), or to eliminate the taxation on loan forgiveness (see below).
Policymakers need to think bigger around scaling take-up and improving access to income-based repayment plans and other solutions to provide both broader, but also well-targeted, relief to people with unmanageable debt burdens. In the meantime, cutting a deduction on loan interest to help pay for tax cuts that send the biggest benefits to the wealthy and corporations makes little sense.
3. College Endowments
What the GOP proposals do
Both proposals include a 1.4-percent excise tax on endowments at private institutions that enroll more than 500 students and have endowments of more than $250,000 per student (the original House proposal set that cut-off at $100,000 but was quickly amended). The original provision in the House bill raised $3 billion over ten years; the new version will generate less revenue.
What they can do instead
Last month, New America further analyzed Raj Chetty’s Mobility Report Cards, highlighting that students from the bottom income quartile make up just 4 percent of the student body of elite private colleges. When those institutions do enroll low-income students, however, the chances that those low-income students will scale several rungs up the income ladder skyrockets.
Congress could use the tax code to bring accountability to elite institutions by attaching requirements to serve low-income students to their tax-exempt status, or by giving elite institutions a way out of the—as-written—useless excise tax: enroll more low-income students and spend more on need-based aid for those students.
4. Loan Relief and Taxable Income
What the GOP proposals do
The House GOP tax bill makes any income received as a result of the discharge of student loans due to death or total disability excludable from taxable income. The Senate bill does nothing to address the potential tax liability for student loan discharges.
What they can do instead
The change made in the House bill provides welcome relief but does not go far enough. Congress should also extend relief from tax liability to (a) borrowers receiving loan relief because they were defrauded by their school, codifying a right already recognized in existing IRS opinions, as well as to (b) people who get their student loans forgiven after making the twenty–twenty-five years of payments required by income-based repayment plans.
Conclusion
The GOP tax proposals not only put important, targeted grant aid investments like Pell grants at risk of future cuts, but House Republicans would also immediately cut higher education provisions, primarily to offset tax cuts skewed toward wealthy families and corporations.
Like many others, students and borrowers have a lot to lose in the current tax debate.
Tags: taxes, Pell Grants, higher education tax benefits
The GOP Tax Proposal Hurts Students. Here’s A Better Approach.
The House Republican tax bill heading to the floor this week cuts approximately $65 billion in higher education tax benefits. And while the Senate proposal skips over most higher education tax provisions, both proposals also add $1.5 trillion to the deficit, putting critical investments like Pell grants, as well as non-education federal investments that promote financial security and economic mobility, at increased risk going forward.
By hacking away at higher education tax benefits to pay for tax cuts that send the biggest benefits to higher-income families and corporations, the House proposal pulls money from students and families in debt. At the same time, both bills would set the stage for even more harmful cuts in future Republican budget proposals. The GOP already points to the deficit to justify budget proposals that severely underinvest in—or cut—federal spending on successful programs like the Pell grant. Make no mistake—tomorrow’s students will be asked to pay for today’s corporate tax cuts.
So what should lawmakers have done instead? A tax bill designed to (a) create both a more equitable and economically efficient tax code, while (b) leveraging existing aspects of the code to improve the higher education system, would have looked very different. That alternative tax reform bill would have had to include a major overall shift in spending priorities to focus on low- and middle-income families, and it also would have treated higher education tax provisions very differently. Below is a quick look at four of those provisions.
1. Lifetime Learning Credit/AOTC
What the GOP proposals do
The House proposal ends the Lifetime Learning Credit (LLC), a non-refundable credit providing up to $2,000 for qualified education expenses. Because of certain eligibility criteria and the availability of the American Opportunity Tax Credit (AOTC)—a partially refundable tax credit available for qualified education expenses for four years—the LLC is most useful to graduate and nontraditional students. The bill puts some of that money into expanding the American Opportunity Tax Credit for an extra year (up to $1,250, half of what’s available in the first four years), but pulls most of that money—$17.3 billion—in order to pay for tax cuts that disproportionately benefit corporations and wealthy families. The Senate bill stays silent on these higher education provisions.
What they can do instead
Higher education tax provisions are too complicated and should be better targeted to the families who need more help paying for college; however, the House bill uses simplification as a cover for moving $17.3 billion from education to poorly targeted tax cuts. A tax reform bill could instead consolidate existing higher education tax benefits to both make the AOTC fully refundable and to coordinate it more seamlessly with Pell grants, so that low-income students can combine the benefits to living expenses beyond tuition, fees, and books—reforms previously proposed by think tanks and advocates.
2. Student Loan Interest Deduction and Other Exclusions
What the GOP proposals do
The House proposal raises taxes on student loan borrowers by ending the student loan interest deduction, an above-the-line deduction of up to $2,500 that phases out above $80,000 for individuals. At present, more than 12 million borrowers take this deduction. In eliminating it, House Republicans once again conflate “simplification” with “benefit cuts.”
The bills also cut a number of smaller exclusions, including the exclusion from income of employer-provided educational assistance and of certain qualified tuition assistance. The Senate GOP proposal leaves these exclusions and the student loan interest deduction intact.
What they can do instead
Given the scale of student debt loads, eliminating a deduction that could be better targeted to pay for tax cuts that are very poorly targeted goes in the wrong direction. A positive reform would be to target the deduction toward those who need more help paying down debt—perhaps by lowering income limits or phaseouts—and spend any savings on low-income students by reducing amounts borrowed in the first place through improvements to the AOTC (as discussed above), or to eliminate the taxation on loan forgiveness (see below).
Policymakers need to think bigger around scaling take-up and improving access to income-based repayment plans and other solutions to provide both broader, but also well-targeted, relief to people with unmanageable debt burdens. In the meantime, cutting a deduction on loan interest to help pay for tax cuts that send the biggest benefits to the wealthy and corporations makes little sense.
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3. College Endowments
What the GOP proposals do
Both proposals include a 1.4-percent excise tax on endowments at private institutions that enroll more than 500 students and have endowments of more than $250,000 per student (the original House proposal set that cut-off at $100,000 but was quickly amended). The original provision in the House bill raised $3 billion over ten years; the new version will generate less revenue.
What they can do instead
Last month, New America further analyzed Raj Chetty’s Mobility Report Cards, highlighting that students from the bottom income quartile make up just 4 percent of the student body of elite private colleges. When those institutions do enroll low-income students, however, the chances that those low-income students will scale several rungs up the income ladder skyrockets.
Congress could use the tax code to bring accountability to elite institutions by attaching requirements to serve low-income students to their tax-exempt status, or by giving elite institutions a way out of the—as-written—useless excise tax: enroll more low-income students and spend more on need-based aid for those students.
4. Loan Relief and Taxable Income
What the GOP proposals do
The House GOP tax bill makes any income received as a result of the discharge of student loans due to death or total disability excludable from taxable income. The Senate bill does nothing to address the potential tax liability for student loan discharges.
What they can do instead
The change made in the House bill provides welcome relief but does not go far enough. Congress should also extend relief from tax liability to (a) borrowers receiving loan relief because they were defrauded by their school, codifying a right already recognized in existing IRS opinions, as well as to (b) people who get their student loans forgiven after making the twenty–twenty-five years of payments required by income-based repayment plans.
Conclusion
The GOP tax proposals not only put important, targeted grant aid investments like Pell grants at risk of future cuts, but House Republicans would also immediately cut higher education provisions, primarily to offset tax cuts skewed toward wealthy families and corporations.
Like many others, students and borrowers have a lot to lose in the current tax debate.
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Tags: taxes, Pell Grants, higher education tax benefits