A jump-start for the economy means a helping hand for many new college students entering the 2009-10 school year.

Thanks to the recent passage of the 2009 American Recovery and Reinvestment Act, students from both low- and middle-income households will receive increased financial help this year.

However, the financial breaks won’t last forever. One major problem with the stimulus bill is that the changes are temporary, says Lauren Asher, director of the Berkley, Calif.-based student finance think tank The Project on Student Debt.

What will happen in future years remains uncertain, Asher says. But she hopes the bill will provide a springboard for further boosts in federal financial aid.

“Students need access to even more need-based aid,” she says. “But hopefully this (bill) will help families continue to invest in education so when the economy does bounce back, they’re well-positioned to benefit instead of go deeper in the hole.” 

Here’s how the stimulus bill affects students and their tuition-paying parents in the next two school years

Larger Pell grants — and more of them

A $17 billion increase in the Pell grant — as well as the new eligibility requirements — offers the most direct way students will benefit from stimulus legislation.

Starting July 1, the maximum Pell grant annual allowance will increase from $4,731 to $5,350 for the 2009-10 school year, the largest increase since the program began. It will increase again to $5,550 for the 2010-11 school year.

The increased grant will cover approximately one-third of the total annual cost of attendance, room and board included, at the average public, four-year in-state school, or about 15 percent of one year at the average private college or university, according to the College Board.

The increased Pell grant doesn’t just sweeten the pot for those who already qualify for the award; it also means a greater number of students are now eligible for the grant.

Pell grant changes
Funding for the Pell grant has been increased, and eligibility requirements have been changed:
  • Maximum 2009-10 allowance: $5,350.
  • Maximum 2010-11 allowance: $5,550.

To determine who gets a Pell grant, the U.S. government calculates the amount each family is expected to contribute to college based on a number of factors, including income, assets and how many children are attending school at once, then compares it to the maximum annual Pell grant allowance.

Families expected to contribute 95 percent or less of the maximum Pell grant award receive a grant from the government. Thanks to the award increase, an additional 800,000 students will now be eligible to join the 7 million students who currently receive the Pell grant.

All of the newly eligible students come from borderline middle-income households that typically don’t qualify for need-based aid.

“For every $100 they raise the Pell grant, an additional 130,000 to 160,000 (students) qualify,” says Mark Kantrowitz, publisher of the financial aid Web site Finaid.org. “Families with incomes of around $50,000, maybe even up to $55,000, will be eligible for the grant this coming year.”

However, the increases in the Pell grant are a temporary measure. After the 2010-11 school year, the Pell grant maximum will drop by $300 and stay at that level until new legislation is introduced.

To get a slice of the increased Pell grant funds, students should complete a Free Application for Federal Student Aid, or FAFSA, as soon as possible.

Better tax credits

Students from middle- and low-income households will benefit from the stimulus bill’s $13.8 billion tuition tax-credit boost.

Dubbed the American Opportunity Tax Credit, the new break replaces and expands on the Hope scholarship tax credit. Under the new plan, the maximum tuition tax credit has been raised from $1,800 to $2,500 — 100 percent reimbursement for the first $2,000 spent on higher education and 25 percent of the next $2,000 spent on qualified educational expenses.

The legislation expands the definition of “qualified educational expenses” to include books and required course materials.

Thanks to the new legislation, families that don’t earn enough to pay income tax can receive a $1,000 refund. The legislation also allows students to apply for tax credits for all four years of their undergraduate education instead of just the first two years.

American Opportunity Tax Credit
A new tax credit gives students a break of up to $2,500. The credit is subject to the following income limits:
  • $80,000 for single filers; partial tax credit up to $90,000 in income.
  • $160,000 for joint filers; partial tax credit up to $180,000 in income.

The stimulus legislation raises the income limits for tax-credit eligibility. New limits for receiving the full credit are $80,000 for single filers, up from $48,000, and $160,000 for joint filers, up from $96,000.

Single-filers earning between $80,000 and $90,000 and joint filers earning between $160,000 and $180,000 will be eligible for a partial tuition tax credit.

After the 2010-11 school year, tuition tax credits will go back to 2009 levels.

Since the median U.S. household income is $50,233 according to the Census Bureau, many students qualify for the tax credit. However, in the past, not everyone who was eligible took advantage of the credit. 

A study by the Urban-Brookings Tax Policy Center in Washington, D.C., found that one out of every three tax credit-eligible students misses out on tax savings simply by not applying.

More school-specific financial aid

The stimulus legislation also adds an additional $200 million in work-study funding, providing more paid job opportunities for students with demonstrated financial need. Income earned from work-study programs is not subject to income tax.

“It’s going to give work-study jobs to about 81,000 more students,” Kantrowitz says of the legislation. “It’s not a lot, but it’s a step in the right direction.”

The impact of the increased work-study funds will vary from campus to campus, adds Kantrowitz, as will the effect of $39.5 billion the bill allocates to make up for state budget cuts. Many of these budget cuts targeted state-funded higher education institutions.

“The number of students applying for financial aid increased by 10.5 percent this past year,” Kantrowitz says. “That’s a record increase. That’s 1.4 million additional students submitting FAFSA and those state funds will help colleges take care of some of that.”

To land a work-study job, students must complete a FAFSA form to qualify then head to their financial aid office to find out what positions are available.

When talking one on one with an aid officer, students should also inquire about any new school-specific scholarships, grants or fellowships available for the upcoming school year.

After the 2010-11 school year, work-study funding will go back to its 2009 levels.

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