Tax relief for study balances budget

August 29, 1997

COLLEGE students and their parents will enjoy an estimated $40 billion worth of tax credits towards tuition in the next five years as part of an historic agreement to balance the United States federal budget.

Rather than providing outright loans or grants, lawmakers offered sweeping income tax deductions for families who are paying tuition, repaying college loans or depositing some income into savings accounts towards future college costs.

President Clinton called the tax breaks for students and their families "the biggest investment in higher education since the GI Bill", which provided nearly free educations to veterans returning after the second world war.

A proposed tax on the benefit derived from tuition waivers given graduate students in exchange for teaching was averted after students and university administrators rallied against it and enlisted the support of influential congressmen. Also restored was an expiring exemption that lets employees receive tuition assistance for job-related education from employers without having to pay income taxes on it.

The new law, designed to balance the federal budget by 2002, was not all good news for higher education. It cuts the money available to administer federal student loan programmes by nearly $2 billion, partly by curtailing a processing fee paid to colleges and universities.

It also revokes the tax-exempt status of the College Retirement Equities Fund, which manages the pensions of 2.1 million academics. The fund's assets will be taxed, reducing the payouts to retirees, but providing an estimated $1.1 billion in income to the government over the next five years.

But students and their families fared best of almost any constituency, reaping nearly half of the total $94 billion in tax relief that will go to all Americans over the next five years.

They now will be eligible for two new tax credits: Clinton's "Hope Scholarship", not really a scholarship at all but a tax credit worth up to $1,500 a year for the first two years of college; and a second programme that lets students and their families deduct from their income taxes 20 per cent of the first $5,000 in tuition paid for the third and fourth year of college, or for any stage of graduate school.

Interest paid on student loans also now will be tax-deductible for low and middle-income borrowers, even though other consumer loan income no longer can be claimed as a deduction. Parents will be able to contribute $500 of their income annually, tax-free, to a new education savings account for every child under age 18.

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