[ Golden Gater Online - October 23, 1997 ]
Kathy Stevens
Staff writer
The price of higher education just got lower for some students who are eligible for tax credits and deductions available next year.
Starting in January, three tax incentives, geared toward middle-income students and their parents, will be available under the federal Tax Relief Act of 1997, which was enacted in August.
For freshmen and sophomores, the act implements a $1,500 Hope Scholarship Tax Credit (the equivalent of a coupon off their taxes). For juniors, seniors and graduate students, there's a Lifetime Learning Tax Credit, which could save them up to $1,000.
Besides credits, the act also phases in a tax deduction: interest payments on student loans can be subtracted to reduce income tax owed, according to Dana Callihan of the California Student Aid Commission. He added that these credits could slightly decrease financial aid awards.
The Hope Scholarship, however, is a credit that covers annual college tuition and fees for the first $1,000 paid and one-half of additional tuition and fees thereafter -- for a maximum credit of $1,500. This credit is available to students in their first two years of either community college, vocational schools or four-year universities, but cannot be used by community college students receiving full financial aid.
Juniors, seniors and graduate students are eligible for the Lifetime Learning Tax Credit, which yields an annual 20 percent credit to offset up to $5,000 in tuition and fees until the year 2002. In 2003, scholars can take 20 percent off the first $10,000 spent on tuition -- doubling the credit potential, said Callihan.
The credit decreases when adjusted gross income exceeds $80,000 in a double income household or $40,000 for individuals. Individuals who earn $50,000 and joint filers who make $100,000 are not eligible.
One downside to new tax incentives is that it could reduce the amount of financial aid awards, whether in the form of loans, grants or scholarships. Tax credits enable taxpayers to shell out fewer dollars in income tax, putting more money in their pockets.
"It's possible there may be an impact there that affects adjusted gross income and that could impact the amount of financial aid students receive, but it probably won't be significant," Callihan said.
Adjusted gross income is used to calculate financial aid awards along with family size, number of children in college, parents' income and assets and student income.
A recent 5 percent tuition reduction was signed into law earlier this month for California universities, which is accessible to all students, regardless of income, unlike these tax breaks. Geared toward middle-income students, these tax credits leave the most impoverished out in the cold, according to Tom Rutter, SF State Financial Aid director.
"Many of our students are dependent on financial aid and a tax incentive doesn't necessarily help the neediest of the needy," Rutter said. "The credit helps a group of students who don't receive any aid, or get only limited aid like student loans."
With student financial aid totaling $4.5 billion in California, Callihan said that students should also consider how they structure education payments since interest on these loans will also be deductible. For instance, rather than paying smaller payments over a longer period of time, students might consider large payments to take advantage of this deduction.
Deductions will be phased in during the next three years. In 1998, taxpayers can deduct up to $1,000 in interest paid on student loans. And $1,500 in interest can be deducted the following year, with maximum interest payment deductions topping out at $2,500 by 2001.
[ Golden Gater - October 23, 1997 ]